Dominican University

• GSB 613

• 2. Explain why the following patterns seem to hold in many industries: a. Small firms are more likely to outsource production of inputs than are large firms. b. Standard inputs (such as simple transistors that could be used by several electronic manufacturers) are more likely to be outsourced than tailor-made inputs (such as a circuit board designed for a single manufacturer’s specific needs). a. Figure 4.2 illustrates that a firm gains less from vertical integration the greater the ability is of outside market specialists to take advantage of economies of scale and scope relative to the firm itself. A small firm might not be able to take advantage of the economies of scale and scope because its level of production would not offset the significant, up-front setup costs or meet the demands of a large market outside the firm. A large firm might be able to produce a sufficient level of output and achieve the same economies of scale and scope that an outside firm would have.