What is Horizontal Integration?
Horizontal integration refers to a strategy used by companies to acquire or create units of production for purposes of generating outputs that are similar. The outputs generated can either be competitive or complementary. An example of horizontal integration is where a company takes over a competitor within the same sector or industry, involved in production at the same level, for purposes of creating monopoly. A company may also use horizontal integration when it opts to manage products that are similar but with vary in terms of price, quality and complexity. This strategy reduces competition while increase a company’s share of the market through economies of scale. For instance, a car manufacturing company can acquire a competitor who is involved in the production of the exact same product. Horizontal integration is the exact opposite of what is referred to as vertical integration. Vertical integration happens when a company collapses several levels of production into lesser production units.
Importance of Horizontal Integration
Horizontal integration, whether done in a company or society has several benefits. The most obvious benefit is economies of scope and scale. For a company, horizontal integration provides a strong presence within its market. It can also enable the company to operate as a monopoly where it sets its own price. This can put society at a disadvantage causing regulators to step in and constrain the effect of horizontal integration. Besides this, horizontal integration can lead to expansion and growth of a company. This is a result of product differentiation opportunities that come with integrating. As a result, the company can enjoy low competition and economies of scale. However, if many companies take up this strategy, it can easily lead to monopoly that hurts society. Horizontal integration mostly takes the form of acquisitions, mergers or even hostile takeovers.