Question

How do firms use horizontal, vertical, and related types of acquisitions to increase their market power?

Answer 1

Horizontal and vertical integrations are strategies that companies use in the same manufacturing process or industry. A company takes over another, working at the same stage of the value chain in a sector, in a horizontal integration. On the other hand, vertical integration means adding business operations within the same vertical development.

If a company wants to grow by horizontal integration, its goal is to acquire in the same sector a similar company.
In order to increase their size, diversify product or service offerings, achieve economies of scale, or reduce competition, companies may choose to undergo horizontal integration. You may also want access to new clients or markets, even abroad. For example, in order to start operations overseas, a department store may choose to combine with a similar one in another country. If efficient, the effect of horizontal integration is the ability to generate more revenue together compared to when operating individually.

A company undergoing vertical integration acquires a company operating in the same industry's production process. Some of the reasons companies choose to integrate vertically include reinforcing their supply chain, reducing production costs, capturing upstream or downstream profits, or accessing new channels of distribution. To do this, one company acquires another company in the supply chain phase, either before or after it.