MANAGERIAL ECONOMICS

Added on - 03 Dec 2019

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MANAGERIALECONOMICS
TABLE OF CONTENTSINTRODUCTION...........................................................................................................................1Concept of Vertical Integration...................................................................................................1Advantage of vertical integration................................................................................................3Disadvantages of Vertical Integration.........................................................................................4Examples of Vertical Integration in business world....................................................................5CONCLUSION................................................................................................................................6REFERENCES................................................................................................................................7
INTRODUCTIONManagerial economics is that branch of knowledge which helps in applying the relevantconcepts to the situations of the business. It is very resourceful in making of the decisions andoffers a rational solution of the problems which are confronted. The purpose of this report is tounderstand a term called vertical integration and its uses. It also shows wider economicimplications of vertically integrated firms. It discusses the factors which encourages thecompanies to adopt strategy like vertical integration.Concept of Vertical IntegrationIn microeconomics and management, vertical integration is regarded as an arrangementin which the supply chain of a firm is owned by that firm. Generally each member of the chaindevelops a different product or service and all the products jointly fulfil a common need (Akerlofand Kranton, 2010). It brings large portion of operations under a common ownership and itbecomes a one corporation. The company tries to own its upstream suppliers and its downstreambuyers. With respect to cost, differentiation and other strategic issues, it can have a significantimpact on the business position (Griffiths and Wall, 2008). The vertical scope of a company isconsidered as an important aspect in the development of a corporate strategy (De Grauwe, 2014).The concept of this kind of integration can be identifiable on the basis of value chain. Here is anexample of backward and forward integration.Figure1: Backward and Forward Integration(Source:Fujita and Thisse, 2013)1
There are two issues which are to be considered while performing the vertical integrationwhich includes cost and control. The cost has an impact on the internal activities of the company.Control affects the barriers to entry and also assures cooperation of key value adding players(Schumacher, 2011). There are many benefits associated with vertical integration. It can also bereferred as a kind of business strategy which is used to achieve expansion through gainingownership of the company’s previous supplier or distributor. Many of the firms use verticalintegration as a method to reduce the cost and to increase the efficiency. It results in increasedcompetitiveness (Caravle, 2002). Now it has been clear that there are two types of verticalintegration that is backward and forward.Forward integration is a kind of vertical integration under which a company make effortsto gain ownership of its distributors. On the other side, under backward integration a companytries to gain ownership of its supplier (Choudhury and Hoque, 2004). However business canutilize either a forward or backward approach or may use a combination of the two which isknown as balanced integration approach (Moschandreas, 2000).Figure2: Figure illustrating vertical integration and contrasting it with horizontal integration(Source: Pesaran and Pesaran, 2010)2