| In microeconomics and strategic management, vertical integration is a theory describing a style of ownership and control. Vertically integrated companies are united through a hierarchy and share a common owner. Usually each member of the hierarchy produces a
different product, and the products combine to satisfy a
common need. It is contrasted with horizontal integration.
A monopoly produced through vertical integration is called a
vertical monopoly.
Three types
There are three varieties of this : backward vertical integration, forward vertical integration, and balanced vertical
integration.
- In backward vertical integration, the company sets up subsidiaries that produce some of the inputs used in the
production of its products. For example, an automobile company may own a tire company, a glass company, and a metal company.
Control of these three subsidiaries is intended to create a stable supply of inputs and ensure a consistent quality in their
final product.
- In forward vertical integration, the company sets up subsidiaries that distribute or market products to customers or
use the products themselves. An example of this is a movie studio that also owns a chain of theaters.
- In balanced vertical integration, the company sets up subsidiaries that both supply them with inputs and distribute
their outputs
Other examples
Some in the music recording industry believe vertical
integration is the best way to survive in the modern, post-Napster environment. The
idea would be to vertically integrate the record label with the radio station of its genre in local
markets. This would allow the label to more cheaply produce music (because many of the elements which make the production
expensive are due to unnecessarily high standards of production required by the radio stations, and the system of payola). It should also ensure that the record company better understands the wants of the
radio listeners. The hope would be that anything the record label would play on their radio station, provided the listening
habits and distribution system of music has not changed, would very likely be a hit.
Another example is the personal computer software company Microsoft. They
produced the widely used Windows operating systems which bundles
with other Microsoft products such as the Internet Explorer web
browser and Windows Media Player.
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