Reference no: EM133089805

A manufacturer of pencils contemplates backwards integration into the production of rapeseed oil, a key ingredient in manufacturing the rubberlike material (called factice) that forms the eraser. Rapeseeds oil is traded in world commodity markets, and its price fluctuates as supply and demand conditions changes. The argument that has been made in favour of vertical integration is this: Pencil production is very utilization sensitive (i.e. a plant that operates at full capacity can produce pencils at much lower cost per unit than a plant that operates at less than full capacity). Owing our own source of supply of rapeseed oil insulates us from short-run supply -demand imbalances and therefore will give us a competitive advantage over rival producers. ? Explain why this argument is wrong.