Horizontal integration

Horizontal integration is the process of a company increasing production of goods or services at the same level of the value chain, in the same industry. A company may do this via internal expansion or through mergers and acquisitions.

The process can lead to monopoly if a company captures the vast majority of the market for that product or service. Benefits of horizontal integration include: increasing economies of scale, expanding an existing market, and improving product differentiation.

Horizontal integration contrasts with vertical integration, where companies integrate multiple stages of production of a small number of production units.

Horizontal integration is related to horizontal alliance (also known as horizontal cooperation). However, in the case of a horizontal alliance, the partnering companies set up a contract, but remain independent. For example, Raue & Wieland (2015) describe the example of legally independent logistics service providers who cooperate. Such an alliance relates to competition.

Benefits of horizontal integration to both the firm and society may include economies of scale and economies of scope. For the firm, horizontal integration may provide a strengthened presence in the reference market. This means that with the merger, two firms would then be able to produce more revenue than one firm alone. It may also allow the horizontally integrated firm to engage in monopoly pricing, which is disadvantageous to society as a whole and which may cause regulators to ban or constrain horizontal integration. Strategies around horizontal mergers often relate to revenue production, reducing market entrants or expanding into new markets. The three forms of horizontal integration are mergers, acquisitions and internal expansion.

Mergers:

Mergers and acquisitions (M&A) refer to the consolidation of companies or assets through various financial transactions, such as mergers, acquisitions, and consolidations. M&A activities can be an effective way for companies to expand their operations, diversify their product or service offerings, and increase their market share. These activities can also lead to cost savings, increased efficiencies, and access to new technologies or markets.

Mergers involve the combination of two or more companies to form a new entity. This can occur through a stock-for-stock transaction, where shareholders of both companies receive shares in the new entity based on a predetermined exchange ratio. Alternatively, a cash merger can occur, where one company purchases another using cash or other financial instruments.