Vertical Integration

Vertical integration is when a company takes direct control and buys an essential part of its distribution or supplier. Horizontal integration is when a company buys another company to expand its outreach or to gain insight into new markets. Though they might sound similar, they are very different. The main difference between the two is that vertical integration is directly buying their distributor or supplier. 

A prime example of vertical integration is the company Netflix. Netflix is a successful online streaming platform. Netflix has copyright licenses to show and stream movies from different

companies. Now Netflix has bought some producers and has created their own movies which have been very successful because they already have such a large subscriber base. 

A drawback to vertical integration could be the initial cost. To buy a distributor or supplier can be very expensive and very costly upfront, therefore, you need projected future cash flows to see if the benefits outweigh the cost. 

From a companies perspective, vertical integration can sound very appealing, however, we must look at how this affects society as a whole. Vertical integration increases the companies' power and independence by buying out their distributors/suppliers when they do this gives them an advantage against their competition. Putting a strain on their competition can create monopolies, then the companies do not have the pressure of the market to determine their prices. That power then makes consumers vulnerable to price gauging. 

This type of corporate strategy affects parts of the population differently. Focusing on the lower-income earners' vertical integration can hurt them significantly. Since there is less competition there is more room and freedom for price manipulation. Since they have the freedom to charge what they want they can charge higher prices at no cost because there is no competition to tell them otherwise. This affects everyone but mostly the lower-income earners because they feel the pain more directly. Looking at the whole economy everyone pays for vertical integration. Monopolies are inefficient because they are not producing as much as they should be, producing more creates lower prices because it lowers the average total cost. If the company is not running efficiently then it is hiring fewer people producing fewer jobs. 

Vertical integration also leads to lower product diversification. Due to lack of competition, they will continue to produce the same type of product with little to no innovation this means that the products are not getting better and if there are issues they keep repeating themselves. 

Because monopolies are not healthy for an economy and are an inefficient strategy in the long run they tend to quickly become in debt. To offset this economic drain the government will then give subsidies to struggling industries, which reinforces the negative cycle. Vertical integration is a quick and slippery slope to a monopoly, and it is important to see if the cost outweighs the long-term benefits.