JayCo has been asked to build bumper for Ford Explorers. To manufacturer these bumpers, JayCo will have to build a factory that costs $10 million. The marginal cost of producing each bumper is $100. Ford has agreed to pay $300 for each bumper and has an order for 60,000 bumpers.

Suppose that once the factory is built, JayCo can modify the assembly line at a cost of $1 million and produce a generic bumper that can be used as a replacement for Chevy truck bumpers. The marginal cost of each bumper is $100 and Chevy would be willing to buy 50,000 of these bumpers for $200 each.

b.What is the quasi-rent? What does it mean? (3 points)

c.Offer a scenario whereby Ford holds up Jayco. (2 points)

d.Can JayCo hold up Ford? Why? (2 points)

e.How does the potential for holdup affect the decision to vertically integrate? (6 points)