The Lim-O: An exercise in market failure and vertical integration

Vertical integration and more generally, corporate-level strategy, are rather difficult for students to grasp, being so abstract concepts. This exercise provides a way for participants to experience the issues leading to market failure (and vertical integration) by engaging them as buyers and sellers of a component for very unique car – a limousine with square tires. Suppliers for square tires are solicited, followed by post-contract renegotiation. The ensuing frustration and heated interactions are leveraged to explain the concepts of asset specificity and uncertainty, causing elevated risk, leading to lack of suppliers and buyers, and forcing firms to become their own suppliers.