External Growth

Methods of Integration

1. Horizontal integration joins two firms at the same stage of the same industry.
2. Backward vertical integration joins a firm with a supplier at an earlier stage of production.
3. Forward vertical integration joins a firm with a later stage, closer to the consumer.
4. Conglomerate integration joins firms in unrelated industries, diversifying their activities.

Reasons for Integration

1. To gain economies of scale and lower unit costs, especially through horizontal integration.
2. To raise market share and market power over price.
3. To secure supplies through backward, or a route to market through forward, vertical integration.
   1. Vertical integration can also capture a supplier's or retailer's profit margin.
4. To diversify and spread risk through conglomerate integration.
5. To grow faster than organic growth would allow.

Consequences of Integration

1. The firm can enjoy lower costs, secured supplies or a secured market.
2. Greater market power may raise prices and reduce choice, harming consumers.
3. Workers may face job losses as duplicated roles are cut.
4. The larger firm may suffer diseconomies of scale and a difficult merging of cultures.

Do mergers benefit consumers?

1. Mergers can benefit consumers when horizontal integration or shared overheads deliver economies of scale that lower average cost; if those savings are passed on, prices fall and consumers gain.
2. But a merger also raises market share and market power, so the combined firm may instead restrict output and hold price above marginal cost, leaving consumers worse off with less choice.
3. The outcome depends on the type of integration: vertical or conglomerate integration can cut costs or spread risk without reducing the number of rivals, whereas a large horizontal merger directly weakens competition.
4. Mergers can also fail to benefit the firm itself: integrating two organisations often brings diseconomies of scale and clashing management cultures, and where the divorce of ownership from control lets managers pursue empire-building or overpay out of hubris, the promised synergies frequently fail to materialise, so neither the firm nor its consumers gain.
5. On balance, mergers benefit consumers when scale economies are large and passed on in a still-competitive market, but harm them when they mainly entrench monopoly power, so it depends on the type of integration, the resulting market concentration, how large the realised synergies actually prove to be and whether they are passed on rather than captured as profit or lost to integration costs, which is why authorities judge each case on its merits.