The term “Horizontal Integration” maybe no stranger to you, but ‘how did horizontal integration limit competition?’ may still be a question that makes you wander around for hours.
Worry not! This article will eliminate your anxiety. Keep scrolling down till the end to get a perfect answer and enrich your business knowledge.
How Did Horizontal Integration Limit Competition? – Answer & Famous Examples
1. Fewer independently owned companies existed to compete
The explanation for ‘how did horizontal integration limit competition?’ can be seen right in the definition of horizontal integration, which is the acquisition of a business operating at the same level of the value chain in either the same industry or different fields.
Unlike vertical integration, where companies collaborate at different stages of production, the firm’s existing at the same stage merge to form a more powerful and profitable business. Therefore, simply after two become one, the number of independently owned companies in the market will decrease.
The quantity of companies intimately relates to the level of competition in a market. The fewer companies are active, the less rivalry appears.
According to Porter’s Five Forces framework, five competitive forces are shaping every industry. Among them, three factors could be overpowered by implementing a horizontal integration strategy in the business, which are competition from existing rivals, the potential of the new entrants into the industry, and the threats from substitutes.
Along with the decline of competition in the market, an oligopoly or even a monopoly could be created if horizontal mergers and acquisitions gradually narrow the number of companies and enlarge the market share for the merged firms.
However, the success of horizontal integration and little competition could be disadvantageous to the customers as they may suffer from the high price of products when the companies possess huge power in the market.
2. Companies benefit from synergies instead of competition
Competition has intuitively existed in the business world for ages, but to the entrepreneurs, what should be more appealing than trying to grab the positions or opportunities of the other brands in the same market? It is the benefit from the synergies brought about by applying horizontal mergers or acquisitions. That is the key answer to the question ‘how did horizontal integration limit competition?’.
The companies can take advantage of economies of scale, which means the larger scope of the production is, the lower cost per unit is. As a result, the profit of the companies will rise when they save money from the production.
Moreover, cost synergies in marketing, research, and development (R&D), production, and distribution also cut down the cost for the businesses. Besides, synergies could also be recognized in collaborating products or markets. Multiple options of the product may provide cross-selling opportunities and expand each business’s market.
With a long list of benefits, horizontal integration not only solves the problem of competition that most companies face but also creates an effective collaboration among several firms in the industry.
3. Famous Examples
Facebook and Instagram can be seen as successful representatives of applying horizontal integration in this millennium. Due to the rapid growth of social media in recent years, the emulation in this industry is significant.
In 2012, the social media giant procured Instagram by paying $1 billion. Facebook realized the acquisition as a wise strategy to enhance its dominance in the industry and attract more online users. Instead of competing with each other, they are doing well in supporting and developing together.
Procter & Gamble’s acquisition of Gillette is a must-know example of a horizontal merger that focuses on the economies of scope strategy.
Since these two companies manufacture hygiene-related consumer products such as toothpaste, razor, and shampoo, the integration immediately declined the production, marketing, R&D, and distribution costs per product, which is beneficial for both brands.
In the hospitality industry, the acquisition of Sheraton by Marriott has demonstrated the answer to the question ‘how did horizontal integration limit competition?’ Before this event, the brand Sheraton was described as “losing its way” for decades. Since the procurement, Marriott has transformed it completely and has given this 80-year-old brand name the resurrection.
Another famous example of the clarification of ‘how did horizontal integration limit competition’ is the horizontal merger of Disney and Pixar in the entertainment media industry. The acquisition would allow Disney to access Pixar’s proprietary technology, attract new audiences and create high-quality, innovative movies.
Lastly, it resulted in lessening the competition as Pixar is considered the leader in the industry in terms of developing and producing computer-animated movies.
Hopefully, the information provided above has helped clarify the question “how did horizontal integration limit competition?”. If you have any questions related to the topic, please leave them in the box below. We will try our best to have your questions answered. You can also share your findings with the other readers here.
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