A firm should consider vertical integration when:

• A. it aims to decrease its market share
• B. it can reduce transaction costs and gain greater control over its supply chain
• C. it wants to increase competition in the market
• D. it seeks to diversify into unrelated industries

Answer: (B)

Verified step by step guidance

1. Understand the concept of vertical integration: it occurs when a firm expands its operations into different stages of production within the same industry, typically by acquiring or merging with suppliers or distributors.
2. Identify the main reasons a firm might pursue vertical integration, such as reducing transaction costs, gaining greater control over the supply chain, improving coordination, and securing inputs or distribution channels.
3. Analyze each option given in the problem to see if it aligns with the typical motivations for vertical integration. For example, decreasing market share or increasing competition are not usual reasons for vertical integration.
4. Focus on the option that mentions reducing transaction costs and gaining greater control over the supply chain, as these are classic economic incentives for vertical integration.
5. Conclude that the firm should consider vertical integration when it can reduce transaction costs and gain greater control over its supply chain, as this aligns with the economic rationale behind vertical integration.