Vertical integration : Problems and Benefits

Static technology

This is the simplest case, where the gains and losses have been studied extensively.

Internal gains:

    * Lower transaction costs

    * Synchronization of supply and demand along the chain of products

    * Lower uncertainty and higher investment

    * Ability to monopolize markets throughout the chain by market foreclosure

Internal losses:

    * Higher monetary and organizational costs of switching to other suppliers/buyers

Benefits to society:

    * Better opportunities for investment growth through reduced uncertainty

Losses to society:

    * Monopolization of markets

    * Rigid organizational structure, having much the same shortcomings as the socialist economy (cf. John Kenneth Galbraith's works), etc...

Dynamic technology

Some argue that vertical integration will eventually hurt a company because when new technologies are available, the company is forced to reinvest in its infrastructures in order to keep up with competition. Some say that today, when technologies evolve very quickly, this can cause a company to invest into new technologies, only to reinvest in even newer technologies later, thus costing a company financially. However, a benefit of vertical integration is that all the components that are in a company product will work harmoniously, which will lower downtime and repair costs.

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