NEW YORK, July 21 — Vertical integration, also called vertical consolidation, is an arrangement in which a company owns and integrates its supply chain. Each member produces a different product or service, combining to satisfy a common need. It contrasts with horizontal integration, where a firm produces related items.
A classic example is the 1920s Ford River Rouge complex, which began making its own steel instead of buying from suppliers. The practice secures supplies and markets but can become anti-competitive, impeding free competition.
How vertical integration works
Vertical integration avoids the hold-up problem. A vertical monopoly results from such integration. A firm’s vertical position in the supply chain measures distance from final consumers: 0 for direct sellers, 1 for suppliers, and so on.
Measurement uses the Real net output ratio: 0 < Real net output ratio = Added Value / Total Production Value < 1. Added value is the difference between turnover and externally purchased services (profit, gross wages, non-wage labour costs).
Less outsourcing means higher integration.
Recent corporate moves: forward and backward
Vertical expansion, or vertical acquisition, involves acquiring companies that produce intermediate goods or help market and distribute a product. It can lower costs and increase profits but may lead to monopolistic control requiring regulation. Examples include forward vertical acquisition of a satellite TV company allowing distribution of media content, and backward vertical acquisition of a content producer.
These deals affect competition in streaming and production markets. The practice can streamline operations and protect supply lines.
Yet caution remains warranted, especially in sectors where a few players already dominate. Regulators in many jurisdictions are watching these deals closely, and the balance between efficiency and fair competition will shape the next wave of corporate consolidation.
