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.
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 ownership or controlling party. Upstream is to your suppliers and downstream is to your buyers (Enz, 2009, p. 214). Although vertical integration is usually upstream or downstream it can also be balanced which is where ownership or control is shared between the firms in the supply chain.
There are multiple benefits associated with vertical integration but some of the benefits may differ between upstream and downstream. Some benefits that may arise are improved coordination between firms throughout the supply chain, cost savings through internalized transactions and an increased market share (Fairburn, & Kay, 1989, p. 10). There are many examples of both upstream and downstream integration in industry throughout history. In the 1970’s and 80’s many crude petroleum extracting companies acquired downstream firms such as refineries and distribution networks (“Idea: Vertical Integration”, 2009). This is mirrored today with many oil companies such as Shell and BP owning all parts of the supply chain from extraction to the petrol stations supplying the consumers.
Smithfield Industries are a meat producing firm that has benefitted from upstream vertical integration. They have integrated with a variety of farms, slaughterhouses as
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 ownership or controlling party. Upstream is to your suppliers and downstream is to your buyers (Enz, 2009, p. 214). Although vertical integration is usually upstream or downstream it can also be balanced which is where ownership or control is shared between the firms in the supply chain.
There are multiple benefits associated with vertical integration but some of the benefits may differ between upstream and downstream. Some benefits that may arise are improved coordination between firms throughout the supply chain, cost savings through internalized transactions and an increased market share (Fairburn, & Kay, 1989, p. 10). There are many examples of both upstream and downstream integration in industry throughout history. In the 1970’s and 80’s many crude petroleum extracting companies acquired downstream firms such as refineries and distribution networks (“Idea: Vertical Integration”, 2009). This is mirrored today with many oil companies such as Shell and BP owning all parts of the supply chain from extraction to the petrol stations supplying the consumers.
Smithfield Industries are a meat producing firm that has benefitted from upstream vertical integration. They have integrated with a variety of farms, slaughterhouses as
Bibliography: Answers. (2011). Vertical Integration. Retrieved November 15 from http://www.answers.com/topic/vertical-integration Avenel, E. (2008). Strategic Vertical Integration without Foreclosure [Electronic Version]. The Journal of Industrial Economics,56(2), 247-262 Black, J., Hashimzade, N., & Myles, G. (2009). Oxford Dictionary of Economics (3rd ed.). Oxford: Oxford University Press Enz, C. A. (2009). Hospitality Strategic Management: Concepts and Cases (2nd ed.). New Jersey: John Wiley & Sons Inc. Fairburn, J. A., & Kay, J. A. (1989). Introduction. In J. A. Fairburn, & J. A. Kay (Eds.), Mergers & Merger Policy (pp. 1-29). New York: Oxford University Press Idea: Vertical Integration. (2009, March 30). The Economist. Retrieved November 12, 2011, from http://www.economist.com/node/13396061 Leiberman, M. B. (1991). Determinants of Vertical Integration: An Emperical Test* [Electronic Version]. The Journal of Industrial Economics, 39(5), 451-466. Microsoft Partners with McDonald’s for Global Point-of-Sale Solution. (2005). Microsoft News Centre. Retrieved November 24, 2011 from http://www.microsoft.com/presspass/press/2005/dec05/12-07McDonaldsPOSPR.mspx Pepall, L., Richards, D., & Norman, G. (2008). Industrial Economics: Contemporary Theory and Emperical Applications (4th ed.). Padstow: Blackwell Publishing Riordan, M. H. (2008). Vertical integration. In S. N. Durlauf, & L. E. Blume (Eds.), The New Palgrave Dictionary of Economics (2nd ed.). Palgrave Macmillian. The New Palgrave Dictionary of Economics Online. Retrieved November 12, 2011, from http://www.dictionaryofeconomics.com/article?id=pde2008_V000029