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.

Better 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…
248). As well as this they will benefit from having a reliable retailer that will have a consistent demand for their products. Although they will have a consistent buyer for their products the subsidiaries will have to receive a lower unit price for their products as a result of bringing down their costs after the integration. This is not a negative as the demand for their product is consistent and the fall in market price will be proportional to the fall in costs.
As well as Smithfield, other meat and poultry production firms have benefitted from having highly integrated production chains such as Tyson, ConAgra and Swift (Pepall, Richards, & Norman, 2008, p. 449). The integration of these firms is consistent with Lieberman’s views (1991, p. 452) of why upstream integration may take place. The main reason which is applicable to this situation is that if the inputs in question account for a large proportion of total cost (which animals being bred for meat will do) then the downstream firm is more likely to integrate.
Although all these firms are highly integrated and could offer much lower prices than they already do to the consumers they choose not to. Having a higher mark up allows them to receive higher profit margins from the lower input costs while keeping similar market prices for their final output. This is a form of non-price
Get Access