1. The firm named Gobby produces sports shoes. Top managers think about backward vertical integration into the production of rubber, a key input for shoes. Rubber is traded in commodity markets and its price fluctuates significantly. The argument that has been made by the top management of the company in favor of this backward vertical integration is this, owning our own source of supply of rubber protects us from price fluctuations and therefore will give us a competitive advantage over competitors. Explain why this argument is wrong.

2. Firm LWR produces cheese and its major customer is a well-known pizza chain ERD. ERD, the pizza chain has developed competitive advantage, based on cost leadership in its strategic group. Should LWR vertically integrate and start to produce pizza? Why? Why not?