Vertical Integration

Vertical integration occurs when a firm expands into a different stage of a value chain in which it already operates. For example, suppose the television manufacturing firm had been purchasing the electronic circuit boards that it uses in its television set products but decides to either buy the supplier or start a new operation to make those parts for itself. This would be vertical integration.

Usually vertical integration will extend to a neighboring stage in the value chain. When a business expands into an earlier stage in the value chain, the business is said to be doing upstream integration. When the expansion is to a later stage of the value chain, the result is downstream integration.

A major motivation for vertical ...

Get Managerial Economics now with the O’Reilly learning platform.

O’Reilly members experience live online training, plus books, videos, and digital content from nearly 200 publishers.