Vertical mergers are often seen as a way to promote competition because it limits the number of competitors. The opposite is true for horizontal mergers, which involve merging two or more companies in the same industry. Many said horizontal integration could limit competition because it involved two firms that directly competed with each other and eliminated one competitor from the market. Sounds quite confusing, right?
Don’t worry; we will get your back! This post will explain the answer to “How Did Horizontal Integration Limit Competition?” in a clearer and more detailed way to help you understand this matter.
Let’s check it out!
Horizontal integration is a business strategy that occurs when one company acquires another company in the same industry. As a result, they manufacture comparable items or offer similar services.
It is a popular method among big businesses as they often use it to boost their power or even as a competitive tool to eliminate smaller companies in the market.
However, when small businesses are “horizontally integrated”, they can also become giants and compete with large companies.
Businesses can perform this integration by buying other companies, expanding their internal, or merging.
The holding firm can gain its goals by employing this strategy:
- Increase the size of the firm
- Use economies of scale to the advantage
- Gain access to new markets
- Reduce rivals
How did horizontal integration limit competition? There are two explanations for that. We’ll look at them in detail right below.
The number of companies in a market is closely related to the level of competition. Thus, as active businesses lessen, so does the competition and vice versa!
In our research, the answer to “How did horizontal integration limit competition?” resides within the meaning of the integration.
When two companies have the same value chain level, they can merge to build a more affluent and lucrative company. Two becoming one means fewer competitors; therefore, less competition.
Yet, what was the true purpose of using this integration to limit competition? The following explanation is developed on three competitive forces in Porter’s Five Forces. And those are the ones that shape every industry.
Porter’s model shows that almost every company in the world uses this integration as their strategy to reduce the threat from their current rivals and new entrants and alternatives.
But, the drop in competition usually coincides with the oligopoly rise and even monopoly, which the governments strongly oppose.
So, if the approach works and competition decreases, buyers may face many disadvantages due to the increased cost.
Another explanation for “How did horizontal integration limit competition?” is to enhance synergies of the combined companies and then reduce competition among multiple businesses.
When this strategy is applied effectively, the firm will be able to take advantage of economies of scale, resulting in increased output and lower unit costs. That leads to more profit since the costs of production have been reduced.
Combining marketplaces or products of two different merged firms can also create synergy. By doing that, companies can provide more diverse products/services, which improves the cross-selling potential and expands the market of each company.
Many companies have failed as a result of the COVID-19 outbreak. But, Synergies created by this integration allow many enterprises to survive. These synergies also enable them to grow in their marketplaces.
All in all, this approach helps address the issue of market competition and creates beneficial synergies for all unified enterprises in the same field.
Therefore, all of the advantages listed above are critical for answering the question, “How did horizontal integration limit competition?”
To better understand “How did horizontal integration reduce competition?” We will look at a few examples below.
Procter & Gamble’s 2005 acquisition of Gillette is a typical case of a horizontal merger. Both companies concentrated on creating hygiene-related items to save money on product development and marketing.
The merging of two major oil firms, Mobil and Exxon, in 1998 was the largest corporate merger in history. The merger brought together the country’s leading and second-largest energy companies.
Officially, Exxon paid $75.3 billion for Mobil. The purchase gave Exxon access to Mobile’s petrol outlets and product reserves. ExxonMobil is now the world’s biggest oil company, thanks to a combination of factors.
Another well-known acquisition is the Walt Disney Company’s 2017 purchase of 21st Century Fox. After the purchase, Walt Disney gained access to many assets, including FX Networks, the 20th Century Fox film studio, and a 30% share in Hulu. As a result, the film industry’s competitiveness was reduced.
After reading this article, we hope you understand “how did horizontal integration limit competition”. So, the next time you’re considering a strategy to lessen the competitiveness, consider this integration. It not only limits competition but can also increase efficiency and create new growth opportunities. It won’t disappoint you when you give it a try!