Advantages and disadvantages of integration

Question 1

Give THREE advantages of horizontal integration.

Answer 1

1. Knowledge of the production process and market ifs already likely to be high.
2. More likely to be able to bulk buy similar products and hence, exploiting economies of scale.
3. Increases the share of the market and removes rivals.

Question 2

Give THREE disadvantages of horizontal integration.

Answer 2

1. If the market share is large enough to be detrimental to consumers, the competition authorities (CMA) may block the merger.
   E.g Asda + Sainsbury’s
2. Ethos and culture may be different between the two firms.
   E.g BA + Iberia
3. Output becomes too high and costs rise- communication problems.

Question 3

Give THREE advantages of conglomerate integration.

Answer 3

1. Diversify to be less reliant upon the success of one product.
   E.g For and dairy farm
2. Could cross-sell products to different consumers in different markets.
   E.G Argos + Explore learning being placed Sainsbury’s
3. Investment in another market can be useful if there are limited opportunities in the companies existing market.

Question 4

Give THREE disadvantages of conglomerate integration.

Answer 4

1. Unlikely to have a lot of existing knowledge about the new market and existing skillset may not be versatile enough to enter the new market.
2. Less likely to benefit form economies of scale and bulk buying.
3. Ethos and culture clashes.
   Kraft (Mondelēz) + Cadbury

Question 5

Give FOUR advantages of vertical integration.

Answer 5

1. Controlling supplier of goods and material with will lead to a falling costs.
2. Easier to trace where materials and goods come from- avoids scandals.
3. PES is likely to be more elastic due to easier response to a change in price.
4. Control of the complete production process allows the quality of goods and materials being used can be accurate.

Question 6

Give THREE disadvantages of vertical integration.

Answer 6

1. If problems occur, you cannot change your suppliers easily. You have to deal it with yourself.
2. CMA may not like the fact that you have control over your own supplier as this can push rival firms out of the market due the fall on prices.
3. Principal-agent problem can occur as the firm has controlled different stages of the production process.