Horizontal Integration

Yesterday, I talked about vertical integration. Today, we’re talking about horizontal integration. It can be more ruthless and unforgiving.

While vertical integration’s goals were to control costs and gain more freedom, the main goal of horizontal integration is to control more if not all of the industry. Horizontal integration is a business strategy where one company acquires or merges with other companies in the same industry. This does three things: expand market share, eliminate competition, and achieve economies of scale (basically when you produce more output, cost per output decreases in economies of scale).

The most merciless example of this is John D. Rockefeller’s Standard Oil Company in the late 1900s. Rockefeller, at his peak, controlled 97% of the entire oil business in America. He bought almost every company in the oil business. How, you may ask? By undercutting the competition. Let me explain.

Rockefeller had excess wealth. Thus, he would lower the price of an oil barrel. The competition, therefore, will lower their prices to avoid losing customers. Rockefeller would cut the price again. The cycle repeats until the other company/companies go bankrupt. Then, he would buy the bankrupt companies and raise the oil price again, making more profit as he owns a larger part of the industry. In this manner, he almost had a monopoly in the oil business.

Now, unlike vertical integration, horizontal integration on the scales of Rockefeller is impossible in today’s world. Rockefeller’s power scared the federal government, and the antitrust laws that followed that broke Standard Oil into many parts, and these laws pretty much guarantee the impossibility of making a monopoly. Another aspect is undercutting is too risky today. With a much more knowledgable public, simple tactics such as those isn’t going to attract customers; so many other factors like brand loyalty go in to the purchasing of a product. 

That being said, horizontal integration does still exist. Disney buying Pixar is a good example. Facebook buying Instagram and WhatsApp is another great example. It all goes to say, horizontal integration, in its barest form, is still achievable but unimaginable if attempted to take it to the magnitudes of Rockefeller. 

Bye for now.