Problema 11 · Economia de L'empresa UPF Setembre 2012

Practice Case: Asset Specificity and Quasi-Rents: La Vanguardia and Imprentas Maravillosas

To counteract declining circulation, the newspaper La Vanguardia adopts a new strategic initiative: becoming the only daily in Spain printed on high-grade color paper. Printing under this standard demands specialized printing presses. A supplier, Imprentas Maravillosas, S.A. (IM), has the capability to manufacture these presses at a construction cost of €200,000. Once manufactured, the maximum price any alternative buyer (other than La Vanguardia) would be willing to pay for these presses is €100,000.

a.

Identify two ways in which these new printing presses exhibit asset specificity. [5 points]

b.

Director José Antich projects that this new publishing strategy will bring in €500,000 in additional revenue, taking into account all operating expenses except for the purchase price of the presses. Is reaching an agreement between IM and La Vanguardia socially efficient? Explain why. [5 points]

c.

What is the value of the quasi-rent in the business relationship between IM and La Vanguardia after the printing presses have been manufactured? [7 points]

d.

Assume that La Vanguardia agrees to pay IM an amount $p$ for IM to print the paper using these presses. Once the presses have already been built, what is the lowest price $p$ that could sustain trade? What is the highest possible price? [5 points]

e.

Prior to the construction of the machinery, what is the minimum price $p$ necessary to induce IM to build the presses for La Vanguardia ? [5 points]

f.

Why are the minimum prices found in parts (d) and (e) different? [3 points]

g.

Now suppose that competing national newspapers, such as El País and El Mundo, also discover that shifting to high-grade color paper would boost their sales revenues. How does the emergence of these potential alternative buyers affect the specificity of IM's printing presses? [5 points]

h.

How does the existence of these alternative buyers affect the probability that La Vanguardia and IM will vertically integrate? [5 points]