Editing Vertical integration (section)

==Problems and benefits==
{{Competition law}}
There are many problems and benefits that vertical integration brings to an [[economic system]]. Problems that can stem from vertical integration can include large capital investments needed to set up and buy factories and maintain efficient profits. Rapid technology development can increase integration difficulties and further increase costs. The requirement of different business skills venturing into new portions of the supply chain can be challenging for the firm.<ref>{{Cite web |title=What Is Vertical Integration? |url=https://www.thebalancemoney.com/what-is-vertical-integration-3305807 |access-date=2023-03-28 |website=The Balance |language=en}}</ref> Another problem that may stem from vertical integration is the collapse of goals among the various firms in a supply chain. With each firm operating under different systems, integration may cause initial problems in management and production.<ref name=":13">{{Cite journal |last=Wan |first=Xiang |date=2019-12-15 |title=What happened to inventory and cost after a vertical integration? A longitudinal analysis considering demand uncertainty |url=https://dx.doi.org/10.1080/00207543.2019.1584414 |journal=International Journal of Production Research |volume=57 |issue=24 |pages=7501–7519 |doi=10.1080/00207543.2019.1584414|s2cid=115689668 |url-access=subscription }}</ref> Vertical integration also proves to be dangerous when monopolistic problems arise in a capitalistic economy. When this happens, competition is removed and a corporation has the power to control all firms in its supply chain.<ref>{{Cite journal |last=Edwards |first=Corwin D. |date=1953 |title=Vertical Integration and the Monopoly Problem |url=https://www.jstor.org/stable/1247017 |journal=Journal of Marketing |volume=17 |issue=4 |pages=404–410 |doi=10.2307/1247017 |jstor=1247017 |issn=0022-2429|url-access=subscription }}</ref>

Large companies are more likely than smaller companies to employ vertical integration, as they have more resources to manage each stage of production (e.g. major expansion and funding). Vertical integration allows control of production from beginning to end. Vertical integration requires a company to focus not only on its core business, but also on several difficult areas such as sourcing materials and manufacturing partners, distribution, and finally selling the product.

One benefit is that the implementation of vertical integration can yield increased profit margins or eliminate the leverage that other firms or buyers may have over the firm.<ref>{{Cite web|last=Edwards |first=Janice |date=2014-09-12 |title=Vertical Integration Strategies |url=https://opentextbc.ca/strategicmanagement/chapter/vertical-integration-strategies/ |language=en}}</ref> It allows improved coordination between production and distribution firms and decreases the cost of exchange of goods between firms within a supply chain.<ref name=":13"/> Operational routines also become more consistent and certain as the management of these firms gradually merge.<ref name=":13"/> Vertically integrated firms rarely need to worry about the sufficiency in their supply of materials because they generally control the facilities that provide them.<ref name=":2">{{Cite news |last=Buzzell |first=Robert D. |date=1983-01-01 |title=Is Vertical Integration Profitable? |work=Harvard Business Review |url=https://hbr.org/1983/01/is-vertical-integration-profitable |access-date=2023-03-21 |issn=0017-8012}}</ref> A vertically integrated company also creates high barriers of entry into their respective economy, eliminating most potential competition.<ref name=":2" /> Implementing vertical integration can be beneficial in that it reduces the distance that separates the suppliers and customers from the resources or information, which can then boost profits and efficiency.<ref name=huang>Huang, J.-J. (2016), Resource decision making for vertical and horizontal integration problems in an enterprise. Journal of the Operational Research Society, 67(11), 1363–1372, {{doi|10.1057/jors.2016.24}}</ref>

There are internal and external society-wide gains and losses stemming from vertical integration, which vary according to the state of technology in the industries involved, roughly corresponding to the stages of the industry lifecycle.{{clarify|date=May 2025}}{{citation needed|date=May 2025}} Static technology represents the simplest case, where the gains and losses have been studied extensively.{{citation needed|date=May 2025}} A vertically integrated company usually fails when transactions within the market are too risky or the contracts to support these risks are too costly to administer, such as frequent transactions and a small number of buyers and sellers.

===Internal gains===
*Lower [[transaction costs]]
*Synchronization of [[supply and demand]] along the chain of products
*Lower uncertainty and higher investment
*Capture of profit margins from upstream or downstream
*Ability to [[Monopoly|monopolize]] market throughout the chain by [[market foreclosure]]
*Strategic independence (especially if important inputs are rare or highly volatile in price, such as [[rare-earth metals]]).
*Enhancing the company's ties with its suppliers<ref name=huang />
*Lower the threshold for entry. A sustained high surplus phase must be protected by barriers to entry. As a result, a vertically integrated entrant is able to extend these barriers at a lower cost than the value of existing surpluses.<ref>Stuckey, J., & White, D. (1993). WHEN AND WHEN NOT TO VERTICALLY INTEGRATE. [[Sloan Management Review]], 34(3), 71–83.</ref>

===Internal losses===

*Higher monetary and organizational costs of switching to other suppliers/buyers
*Weaker motivation for good performance at the start of the supply chain since sales are guaranteed and poor quality may be blended into other inputs at later manufacturing stages
*Specific investment, capacity balancing issue 
*Developing new business competencies can compromise on existing competencies
*Conflicts in inventory management post-integration<ref name=":13"/>
*Demand uncertainty may increase due to inventory instability<ref name=":13" />
*Assigning limited purchasing resources among the suppliers as well as the production of goods or services<ref name=huang />

===Benefits to society===
* Better opportunities for investment growth through reduced uncertainty{{citation needed|date=January 2020}}
* Local companies are often better positioned against foreign competition{{citation needed|date=January 2020}}
* Lower consumer prices by reducing markup from [[intermediaries]]<ref>[https://www.jdsupra.com/legalnews/doj-and-ftc-propose-highly-anticipated-60222/ DOJ and FTC Propose Highly Anticipated Vertical Merger Guidelines]</ref>
*Accomplishing the maximum profits for selling products or services.<ref name=huang />

===Losses to society===
*[[Monopolization]] of markets
*Potential for [[vertical foreclosure]]
*Rigid [[organizational structure]]
*Manipulation of prices (if market power is established)
*Loss of tax revenue in the case of sales taxes.{{citation needed|date=October 2019}}