Vertical Intergration

According to a North American dictionary entry vertical integration is defined as “merging of companies in supply chain: the merging of companies that are in the chain of companies handling a single item from raw material production to retail sale” (“Vertical Integration,” 2009). Though the definition of vertical integration is quite simple the concept is much more complicated than one may think. There are four strategic factors that must be established by business leaders before the implementation of vertical integration can take place that must be well-thought-out in order to achieve any level of success. The factors that influence vertical integration are economic, market, operational, and strategic.

Economic Factors

Of the strategies used to implement vertical integration authors Meyer and Wang expressed their feelings about influential economic factors in the following quote:

“the most prominent pro-competitive effect of a vertical integration is the elimination of pre-merger double marginalization which arises when both the upstream and downstream markets exhibit some degree of economic market power, and thus firms at each level mark up their prices above marginal cost” (Meyer and Wang, 2011).

In addition to the pro-competitive economic effect some firms also experience what is known as a post-merger which is basically an incentive for a firm to raise downstream competitor costs by raising upstream market costs. Hence the increased price pressures the previously established downstream prices which cause conflict.

Market Factors

Some argue that it is imperative for a firm to conduct research and understand industry dynamics and market factors before any sort of vertical integration can be established....

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...question correctly and provides peers with a good detailed basis of vertical integration.

Works Cited

Haupt, Lynne. (2005). Vertical integration and strategic sourcing in the

biopharmaceutical industry. Manuscript submitted for publication, Sloan School of Management and the Department of Mechanical Engineering, Massachusetts Institute of Technology, Cambridge, Massachusetts. Retrieved from dspace.mit.edu/bitstream/handle/1721.1/34827/61670866.pdf?sequence=1.

Meyer, C.S., & Wang, Y.I. (2011). Determining the competitive effects of vertical

integration in mergers. Economics Committee Newsletter, 11(1), Retrieved from www.nera.com/nera-files/PUB_Vertical_Integration_0511.pdf.

Vertical Integration. (2009). Encarta world English dictionary. Retrieved July 6, 2011,

From http://www.bing.com/Dictionary/search?q=define+vertical+integration&FORM=DTPDIA.