Question

Consider the pizza restaurants and explain the following issues.

1. Explain the effect of a horizontal integration of all the firms in the industry on the pricing behavior of the merger.
2. Given the merger in point 1, explain the changes in the concentration of the industry.
3. Given the merger in point 1, explain the relationship between the elasticity of the industry demand and that of the firm.
4. Given the merger in point 1, explain how entry into the industry is affected.
5. Explain the value of the Lerner index for the competitive market.
6. Explain why the competitive market has a very low concentration.

Answer 1

Vertical integration is a competitive strategy by which a company takes complete control over one or more stages in the production or distribution of a product. It is covered in business courses such as the MBA and MiM degrees.

A company opts for vertical integration to ensure full control over the supply of the raw materials to manufacture its products. It may also employ vertical integration to take over the reins of distribution of its products.

A classic example is that of the Carnegie Steel Company, which not only bought iron mines to ensure the supply of the raw material but also took over railroads to strengthen the distribution of the final product. The strategy helped Carnegie produce cheaper steel, and empowered it in the marketplace.

Horizontal integration is another competitive strategy that companies use. An academic definition is that horizontal integration is the acquisition of business activities that are at the same level of the value chain in similar or different industries.

In simpler terms, horizontal integration is the acquisition of a related business: a fast-food restaurant chain merging with a similar business in another country to gain a foothold in foreign markets.