Literature Review Backward Integration

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1. Literature Review – Vertical Integration 2.1 Definitions of Vertical Integration In describing competitive strategy Michael Porter (Porter M, 1980, p.300) strongly suggested that vertical integration was one of the most significant contributing areas. In his definition he states that vertical integration is “the combination of technologically distinct production, distribution, selling and/or other economic processes within the confines of a single firm”. Figure 2 is shown below in order to give some clarity to this definition and also to highlight these aspects within the defined market. Figure 2 – Dimensions of Integration; PMC Industry specific In the work by Harrigan, (1986, p.536) the definition of vertical integration “goes beyond simple value-added ratios” and is “.. a diversification strategy that requires conscious management of potential synergies”. 2.2 Main Body of Literature Review Economic research literature concerning Vertical Integration tends to focus on the foreclosure effect and specifically the issue surrounding the strategy whereby it raises the rivals’ costs. This is when a firm is effectively removed from the upstream market; the remaining firms will find it easier to raise prices – thus increasing the downstream costs of the rival firms. Avenel (2008, P.247) argues that whilst this can be true when the number of upstream firms is low that the effect is “absent as soon as there are three (identical) upstream firm, constant returns to scale and Bertrand competition”. Avenel (ibid) further suggests that this is one possible reason that many markets will likely have more than two competing firms, and why there is limited empirical evidence (Rosengren and Meehan, 1994) of foreclosure. Whilst Vertical Integration has been studied from different perspectives there are two important papers (Heavner, 2004 and Harrigan, 1986)
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