key term - Horizontal Integration

Definition

Horizontal integration is a corporate strategy where a company expands by acquiring or merging with other businesses that operate at the same level of the supply chain and offer similar products or services. This allows the company to increase its market share, economies of scale, and overall competitiveness within a specific industry.

5 Must Know Facts For Your Next Test

1. Horizontal integration can lead to increased market power and pricing control, as the merged company now controls a larger share of the market.
2. By combining resources and operations, horizontal integration can result in economies of scale and scope, leading to cost savings and improved profitability.
3. Horizontal integration can also lead to increased efficiency through the elimination of duplicated functions, such as administrative, marketing, and research and development activities.
4. However, horizontal integration can raise antitrust concerns, as it may reduce competition and lead to the creation of a monopoly or oligopoly in the market.
5. Regulatory bodies often scrutinize horizontal mergers to ensure they do not significantly reduce competition and harm consumer welfare.

Review Questions

• Explain how horizontal integration can lead to increased market power and pricing control for a company.
  • When a company acquires or merges with a competitor through horizontal integration, it can gain a larger share of the market. This increased market share often translates to greater pricing power, as the merged entity can now dictate prices to a larger customer base. With fewer competitors in the market, the company may be able to raise prices without fear of losing significant market share to rivals, potentially leading to higher profits but reduced consumer choice and welfare.
• Describe the potential benefits of horizontal integration in terms of economies of scale and scope.
  • By combining resources and operations through horizontal integration, companies can achieve economies of scale, where the average cost of production decreases as output increases. Additionally, companies can realize economies of scope, where the average cost of producing multiple products decreases due to the sharing of resources and infrastructure. These cost savings can translate to improved profitability and the ability to offer more competitive pricing, potentially enhancing the merged company's market position.
• Evaluate the potential drawbacks of horizontal integration, particularly in terms of antitrust concerns and regulatory oversight.
  • While horizontal integration can bring benefits, it also raises significant antitrust concerns, as the merged entity may hold a dominant market position and reduce competition. Regulatory bodies, such as the Federal Trade Commission and the Department of Justice in the United States, closely scrutinize horizontal mergers to ensure they do not create or strengthen a monopoly or oligopoly, which could harm consumer welfare through higher prices, reduced choice, and stifled innovation. The regulatory review process aims to balance the potential benefits of horizontal integration against the risks of decreased competition in the market.

Related terms

Vertical Integration:

Vertical integration is a corporate strategy where a company expands by acquiring or merging with businesses that are at different stages of the supply chain, such as suppliers or distributors, to gain more control over the production and distribution process.

Conglomerate Merger:

A conglomerate merger is a type of corporate merger where two companies in unrelated industries combine, allowing the new entity to diversify its product offerings and reduce risk through portfolio diversification.

Monopoly:

A monopoly is a market structure where a single company or entity has exclusive control over the supply of a particular good or service, often leading to higher prices and reduced consumer choice.