AutoCorp Economic Analysis
...duced profits for Amalgamated Fabric. If the fabric company became liquidated, AutoCorp would have to either invest in their own plant (vertical integration) or arrange a market relationship with another supplier. The resulting market transactions would involve very specialized products (which would increase their cost) and possible information leaks concerning new products and procedures. This would be highly detrimental and expensive for AutoCorp. It is in their best interest to adopt a non-opportunistic approach with Amalgamated Fabric 3 Opportunistic behavior on the part of Amalgamated Fabric would be highly unlikely. If this occurred, AutoCorp may lose some profit, however Amalgamated would risk liquidation by adopting this approach. 4 In attempting to produce a contract limiting opportunism in this situation, several issues would be problematic. There are factors which affect the market price of automobile seats, these must be forecasted for the next 15 years. Amalgamated must have the ability to survive changing market conditions. If a component in the production of car seat fabric increases unexpectedly, this might increase the variable average cost of producing this good. 5 If AutoCorp adopted a policy of vertical integration there would be several costs involved. There will be initial start up costs of the building an...