Cambridge International as and a level Economics Ebook

Vertical integration
is diff erent. Th
is is where a 
fi rm grows by moving into a forward or backward 
stage of its production process or supply chain, such as 
a manufacturer moving into retail (forward) or taking 
control over some of its supplies (backward). Typical 
examples are in the oil industry where BP, Shell and 
ExxonMobil are involved in exploration, fuel production, 
refi ning, transport and forecourt sales. Nestlé and 
other food producers are increasingly involved in the 
production of coff ee beans, cocoa and milk as well as in 
their manufacture and distribution to retailers and other 
consumers. Vertical integration has various benefi ts 
including improved security and quality of supplies 
and reduced supply chain costs. Th
ere are, however, 
disadvantages, in particular potentially higher costs if the 
newly acquired businesses are not eff ectively integrated. 
Th
is can also be a major problem with any merged 
operation.
Vertical integration: 
where a firm grows by producing 
backwards or forwards in its supply chain.
KEY TERM
Self-assessment task 7.14 contains two contrasting 
experiences of mergers prompted by the perceived benefi ts 
of horizontal integration. Th
is task should be considered 
alongside the results for tasks 7.12 and 7.13.
Cartels
As referred to earlier when considering oligopoly, a cartel is 
a formal agreement between member fi rms in an industry 
to limit competition. Th
e agreement may involve fi xing the 
quantity to be produced by each member or fi xing the price 
for which the product is sold. Other restrictions may also 
be applied. A cartel maximises profi ts in the same way as a 
monopolist (see 
Figure 7.19
).
Th
e Organisation of Petroleum Exporting Countries 
(OPEC) is the best known, long-standing example of a 
cartel. It currently has 12 members and membership is 
Forward vertical integration
Retail outlets
Raw material or component suppliers
Backward vertical integration
Creating conglomerate
enterprises
Manufacturing
Horizontal integration
Lateral 
integration