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5.3 Horizontal Integration

In horizontal integration, a firm either increases the volume of current production activities or expands to similar kinds of production activities. Consider a television manufacturer that operates at the assembly stage of its value chain. If that company bought out another manufacturer of television sets, this would be horizontal integration. If the company were to decide to assemble computer monitors, the product would be a form of horizontal integration due to the high similarity in the two products and type of activity within those value chains.

Cost efficiencies in the form of economies of scale from higher volumes or economies of scope from producing related products are primary driving factors in horizontal integration. When a firm expands to a new product that is similar to its current products, usually there is a transfer of knowledge and experience that allows the expanding firm to start with higher cost efficiency than a firm that is entering this market with no related experience. If an enterprise possesses core competencies in the form of production processes that it can perform as well or better than others in the market, and can identify other products that can employ those core competencies, the enterprise can enter new markets as a serious competitor.

Market power from holding a higher share of all sales in a market is the other major motivation for horizontal integration. As we will discuss in later chapters, the possible gains from increased market power are often so significant that the governments in charge of overseeing those markets may limit or forbid horizontal mergers where one company buys out or combines with a competitor.

Since most firms are buyers as well as sellers, horizontal integration can create an advantage for large firms in demanding lower prices for goods and services they purchase. For example, a national chain like Walmart may be the principal customer of one of its suppliers. If Walmart decides to use a different supplier, the former supplier may have difficulty remaining in business. Consequently, the supplier may have little choice about accepting reduced prices.