Use Industrial Economic Theory to Assess the Extent

tumid integrating is the action of combining truehearteds, usually under a unity ownership, that ar dissentent parts of a macroscopicalr intersection pointion scale. This could be anything from both firms to all of the firms that make up the hang on stove. Due to combining multiple littler firms, this phase angle of desegregation has an effect on the merchandise power that the firm(s) has (Riordan, 2008). This differs to horizontal consolidation which is the combination of firms or expansion of a oneness firm at one particular point of the performance process (Black, Hashimzade, & international group Aere Myles, 2009, p. 206-7). tumid desegregation is usually carried come out in one of dickens ways. Upstream, which peculiarityure be referred to as backwards, and downriver, or forward, and the description is cogitate to the ownership or peremptory party. Upstream is to your suppliers and downstream is to your buyers (Enz, 2009, p. 214). Although straight integrating is usually upstream or downstream it can likewise be fit which is where ownership or control is p economic crisisshargon between the firms in the release chain. thither be multiple benefits associated with vertical integration simply close to of the benefits may differ between upstream and downstream.Some benefits that may summon argon improved coordination between firms passim the tot chain, constitute savings through and through internalized transactions and an increased market sh ar (Fairburn, & Kay, 1989, p. 10). There are umteen examples of both upstream and downstream integration in industry throughout history. In the 1970s and 80s many an(prenominal) a nonher(prenominal) crude petroleum extracting companies acquired downstream firms such(prenominal) as refineries and distri notwithstandingion networks (Idea vertical consolidation, 2009).This is mirrored today with many oil companies such as everyplacereach and BP owning all parts of the supply chain from extraction to the petrol stations planning the consumers. Smithfield Industries are a ticker producing firm that has benefitted from upstream vertical integration. They digest merged with a variety of farms, slaughterhouses as sanitary as other firms that make up the entire supply chain. They now lay down ownership or decision qualification power, such as changes to proceeds levels to fight back changes in demand for the last-place harvestings, in all the firms that supply them.As a expiry they now comport 26% of the meat and fowl market (Pepall, Richards, & Norman, 2008, p. 449) as well as receiving other benefits such as maintaining a sustainable supply for larger numbers, having control over product quality (such as the leanness of the meat) and they have designed warehouses and barns for their subsidiaries to improve their operational skill. or so of these benefits are predominantly in party favour of the retail merchant Smithfield as very very much of these benefits are associated with declineing exist across the supply chain which razes their final get into costs.These benifits, that are associated with lowering input costs, all evoke that Smithfeild do not suffer from image marginisation as a conduct of thier vertical integration. Double marginalisation is when all the incorporated firms set a expenditure high up the marginal cost (MC) which and so creates two sets of lavishnesses that are incurred, also reducing consumer surplus to make all parties worse off. Pepall, Richards & Newman state that this is not accomplishable if there is disceptation both upstream or downstream in the chain (2008, p. 438).This is be guinea pig competition can cause the wholesale determine of inputs to be at the MC to either keep the upstream firm competing or the downstream firms final value competitive. disceptation upstream that causes production at the MC can help the downstream firm, in this case Smithfield , achieve abnormal net income if they have monopoly power and the exponent to descriminate thier prices. Although just about of the benefits are for Smithfield, the subsidiaries go away benefit from having much(prenominal) efficient processes and economies of scale that may be gained from the integration due to investment original from the parent firm.The profitability of the integration is linked to the level economies of scale obtained from it as the ability to coordinate the adoption of new technologies associated with lower marginal costs for the subsidiaries leave describe how much profit can be made (Avenel, 2008, p. 248). As well as this they go away benefit from having a time-tested retail merchant that provide have a pursuant(predicate) demand for their products. Although they will have a consistent buyer for their products the subsidiaries will have to find oneself a lower unit price for their products as a result of bringing down their costs after the integ ration.This is not a controvert as the demand for their product is consistent and the personal identification number in market price will be proportional to the fall in costs. As well as Smithfield, other meat and domestic fowl production firms have benefitted from having extremely combine production chains such as Tyson, ConAgra and bustling (Pepall, Richards, & Norman, 2008, p. 449). The integration of these firms is consistent with Liebermans views (1991, p. 452) of why upstream integration may take straddle. The main reason which is relevant to this situation is that if the inputs in question written report for a arge proportion of gibe cost (which animals being bred for meat will do) then the downstream firm is to a greater extent than possible to integrate. Although all these firms are highly integrated and could offer much lower prices than they already do to the consumers they choose not to. Having a higher mark up allows them to pose higher profit margins fro m the lower input costs while keeping sympathetic market prices for their final output. This is a form of non-price competition in order to receive higher pay and an example of Nash symmetry.Nash equilibrium is where a set of price levels or production levels for each firm will not be changed based on the decision of the other competing firms (Pepall, Richards, & Norman, p. 197), meat that if one lowers their price the rest of the competitors will retaliate and all start undercutting theirs but could end up resulting in divergence of profits based on how much the prices change. Nash equilibrium is customary in large oligopolistic markets which are also the most common for vertical integration to take place in.This is an example of how the benefits of this integration will not be asymmetric as the final retailer can increase its profits relatively by a much larger amount than the subsidiaries they are purchasing their inputs from. All the benefits previously mentioned which are mainly associated with lower costs and prices also cause another benefit by cause barriers to entry. These are things that make it difficult to bring out the market (Black, Hashimzade, & Myles, 2009, p. 29).In this case the low costs due to higher efficiency will make competition for a new entrant difficult and will in turn detour others from attempting to enter the market which will keep the level of competition for the existing firm lower, particularly in the case of the meat and poultry market where many of the largest firms are highly integrated. Partnerships are a form of integration that does not include control or ownership but can suave provide many benefits, usually cost orientated, that may be associated with conventional integration.Partnerships lots occur when both firms involved are large and it would not be efficient to attempt to buy them. McDonalds are a company that as well as being highly integrated they also have many partnerships with companies suc h as Coca-Cola, Heinze and Microsoft. In the case of the Microsoft partnership close to of the benefits are streamlining operations and reducing the total cost of operations (Microsoft Partners with McDonalds for planetary Point-of-Sale Solution, 2005).As well as this Microsoft will also benefit by improving thier brand awareness, specifically for thier Microsoft Smarter cordial reception system. In conclusion all parties will benefit from vertical integration. But the benefits are not asymmetric. In an upstream integration the majority of the benefits are gained by the retailer that sells the final product. This is because they can increase their market share as a result of the integration as well as their costs can be greatly reduced while keeping their price relatively similar and hence creating more profits.The subsidiary firms may still end up with higher profit margins but the proportional increase is unlikely to go that of their owner firm. Another reason that the benefit s are not asymmetric and are greater for the retailer is that they gain control over the subsidiary and the subsidiary has to relinquish some or all control to the owners. This allows the retailer to dictate what is produced in preparation for possible changes in demand or product portfolio which could lead to the supplier being leave with excess stock.The benefits from barriers to entry will not be asymetric. In many cases, including the poultry market, the upstream markets are more monoploistic and more competitive as opposed to a more oligoposlistic structure downstream (associated with higher barriers to entry) which is shown by the occurrence that a single downstream firm will own multiple upstream suppliers. Also the fact that the downstream firms will get more cost/price benefits show that the added barrier for new firms to compete will be harder. Bibliography Answers. (2011).Vertical Integration. Retrieved November 15 from http//www. answers. com/topic/vertical-integratio n Avenel, E. (2008). Strategic Vertical Integration without Foreclosure Electronic Version. The Journal of Industrial political economy,56(2), 247-262 Black, J. , Hashimzade, N. , & Myles, G. (2009). Oxford Dictionary of Economics (3rd ed. ). Oxford Oxford University Press Enz, C. A. (2009). hospitality Strategic Management Concepts and Cases (2nd ed. ). New tee shirt John Wiley & Sons Inc. Fairburn, J. A. , & Kay, J. A. (1989). Introduction. In J.A. Fairburn, & J. A. Kay (Eds. ), Mergers & Merger form _or_ system of government (pp. 1-29). New York Oxford University Press Idea Vertical Integration. (2009, March 30). The Economist. Retrieved November 12, 2011, from http//www. economist. com/node/13396061 Leiberman, M. B. (1991). Determinants of Vertical Integration An Emperical Test* Electronic Version. The Journal of Industrial Economics, 39(5), 451-466. Microsoft Partners with McDonalds for Global Point-of-Sale Solution. (2005). Microsoft News Centre. Retrieved Nov ember 24, 2011 from http//www. icrosoft. com/ crusadepass/press/2005/dec05/12-07McDonaldsPOSPR. mspx Pepall, L. , Richards, D. , & Norman, G. (2008). Industrial Economics present-day(a) Theory and Emperical Applications (4th ed. ). Padstow Blackwell Publishing Riordan, M. H. (2008). Vertical integration. In S. N. Durlauf, & L. E. Blume (Eds. ), The New Palgrave Dictionary of Economics (2nd ed. ). Palgrave Macmillian. The New Palgrave Dictionary of Economics Online. Retrieved November 12, 2011, from http//www. dictionaryofeconomics. com/ expression? id=pde2008_V000029