Oligopolies and vertical integration
When large companies seek to expand their control over the market, they sometimes expand horizontally by buying other, parallel companies. But quite often, they expand vertically, by buying out companies involved in other layers of the same market.
Most markets work on several layers:
- In the DVD market, there are companies that the own the content (the film studios), the companies that manufacture the DVDs, the companies that distribute the DVDs, and the companies that sell or rent the DVDs at the retail level.
- In the beverage industry, there are the companies that own the brand and the recipe, the companies that bottle the products locally, and the companies that sell retail, whether stores or restaurants,
- In the food industry, there are the companies that package and brand the food, the brokers that distribute it to the stores, and the retailers who sell it.
- In the TV industry, there are the studios that produce the shows, the networks that offer them, the local affiliates stations that show them, or, alternatively, the cable or satellite companies that carry the cable networks.
When a company expands vertically, it takes over several of those levels of intermediation, and the object is to maximize control, to no longer be at the mercy of some other company that has its own interests.
The consequence is usually increased risk. These risks come in part from the pressure to use internal resources, when there are more effective or less costly alternatives on the outside. For example, an in-house print and design department is something many companies acquire, thinking they can get better response and lower costs from an internal operation. But such in-house operations are often dropped, because the wasted capacity and lack of competitive motivation may mean worse service and more expense. Likewise, large companies often decide to spin off acquired extensions because the plusses of cutting out the middleman are outweighed by the minuses of running yet another kind of business.
Nevertheless, the amount of vertical integration keeps growing. Some examples:
- Coca Cola and Pepsico have over the last decade steadily bought out the independent bottlers that carry their brands.
- Large food companies like Kraft and General Mills deal directly with retailers, delivering producers directly to the food retailers, bypassing food brokers.
- On the other hand, supermarket chains and Wal-Mart have built large warehouse facilities to handle their own distribution direct from the manufacturer, thus squeezing food brokers from the other end.
- TV networks are more and more producing their own shows in their own studios, rather than buying shows from independent producers. They also own many of the individual broadcast stations in big markets, and will soon be able to buy more, Time-Warner owns cable systems and Fox may soon own its own satellite system in the US. Meanwhile, a cable company like Comcast is getting more and more into the business of producing shows and developing cable channels.
- The major music companies and film companies are doing more and more of the distribution of their own products.
- Clear Channel is not only the largest radio network in the US, but it has become also promoter for concerts in the US, so it has immediate ability to promote its favored artists and concerts on the radio.
As the major companies own more and more of the distribution channels for their products, the more small start-ups have to deal with them to get on the shelves. So even when vertical integration is not a direct money-maker, it can be a significant protector of the core business from market disruption.
9:09:02 AM 
|
|
