Use Industrial Economic Theory to Assess the Extent to Which the Benefits Associated with Upstream and Downstream Vertical Integration Are Likely to Be Asymmetric. Give Real World Examples to Illustrate Your Answer. Essays
Vertical integration is the process of combining firms, usually under a single ownership, that are different parts of a larger production scale. This could be anything from two firms to all of the firms that make up the supply chain. Due to combining multiple smaller firms, this form of integration has an effect on the market power that the firm(s) has (Riordan, 2008). This differs to horizontal integration which is the combination of firms or expansion of a single firm at one particular point of the production process (Black, Hashimzade, & Myles, 2009, p. 206-7).
Vertical integration is usually carried out in one of two ways. Upstream, which can be referred to as backwards, and downstream, or forward, and the definition is linked to the…show more content… 197), meaning that if one lowers their price the rest of the competitors will retaliate and all start undercutting theirs but could end up resulting in loss of profits based on how much the prices change. Nash equilibrium is common in large oligopolistic markets which are also the most common for vertical integration to take place in. This is an example of how the benefits of this integration will not be asymmetric as the final retailer can increase its profits relatively by a much larger amount than the subsidiaries they are purchasing their inputs from.
All the benefits previously mentioned which are mainly associated with lower costs and prices also cause another benefit by causing barriers to entry. These are things that make it difficult to enter the market (Black, Hashimzade, & Myles, 2009, p. 29). In this case the low costs due to higher efficiency will make competition for a new entrant difficult and will in turn detour others from attempting to enter the market which will keep the level of competition for the existing firm lower, especially in the case of the meat and poultry market where many of the largest firms are highly integrated.
Partnerships are a form of integration that does not include control or ownership but can still provide many benefits, usually cost orientated, that may be associated
