1' Disney Purchase of Capital CitiesABC

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1. Disney Purchase of Capital Cities/ABC

• Transfer Pricing -- price at which Disney
  transfers programming to ABC
• Opportunity Cost
• Economies of Scale and Scope in program
  development and advertising
• Transactions costs/holdup problem -- time and
  expense of negotiating, writing, and enforcing
  contracts

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• Coordination of production flows
• Leakage of private information

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2. Effect of falling European trade barriers

• Larger markets for European firms, enhanced
  opportunities for achieving economies of scale
  and scope
• spreading of fixed costs
• purchasing economies
• marketing economies
• transportation economies
• RD

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• Effect on competition -- more competition for
  U.S. and Japan both in Europe and elsewhere
• Type of industry?
• Labor intensive vs. capital intensive
• Asset specificity vs economies of scale

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3. Poletown Case

• Background to case
• New site needed, Poletown only site in Detroit,
  heavily settled neighborhood
• City, UAW in favor of Poletown, residents opposed
• 200 million for Poletown site vs 65-80 million
  for other site.
• Stockholders -- fiduciary responsibility
• Midwestern alternative

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• Stakeholders -- non-fiduciary, moral
  responsibility
• Includes stockholders, community, employees,
  customers, alternative community
• Likely locate in Poletown
• Same conclusion
• If survival of company at risk
• If satisfying stakeholders in best interests of
  stockholders (increases value)

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• Your choice -- depends on strength of argument

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4. GM owns Fisher Body vs tire manufacturer

• Body panels -- relationship specific
• Fundamental transformation, potential for
  opportunism (holdup problem)
• Use of Market
• More difficult and frequent negotiations
• Investment to improve ex post bargaining position
• Reduced investment in relationship-specific
  assets
• Distrust

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• Vertical integration
• Corporate governance
• Repetition of relationship
• Internal management power
• Lose economies of scale
• Tire manufacturers -- not relationship specific
• Less concern over opportunistic behavior/holdup
• Take advantage of economies of scale

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5. Patterns in many industries

• A) Small firms outsource production
• Less able to achieve economies of scale and
  learning economies
• B) Standardized inputs outsourced, tailor-made
  not outsourced
• Standardized inputs -- less asset specificity
• Little risk of opportunism -- lower transactions
  costs
• More opportunity for economies of scale
• Tailor-made -- just the reverse

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6. Diversification to diversify managerial risk
(Ch 3-5)

• Agency Considerations -- difficult to measure
  divisional performance
• Product diversification increases agents
  opportunity for hidden information and hidden
  action (asymmetric information)
• Risk attached to investment in relationship-specif
  ic assets

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• Shareholders spread risk
• If shareholder owns large block of stock, cant
  sell without affecting stock price
• Diversification resulting from internal
  development reduces risk by reducing asymmetric
  information
• Diversified firms less likely to go bankrupt (all
  or nothing)
• Economies of scope reduce risks

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7. Holdup problem related to relationship-specific
assets

• Fundamental transformation with relationship
  specific assets
• Opportunity cost -- redeploying a specific asset
  reduces its value
• Quasi-rents can be transferred to trading partner