Vertical Integration and Competition Policy

Vertical integration can be a source of significant strategic advantage for firms, whether in the form of backward integration to gain security of some important supply or of forward integration to ensure adequate distribution of products or services. It may have profound effects on the competitive processes in an industry, substantially modify the threats from new entrants or substitute products, and mitigate the power of suppliers or buyers. Yet for exactly these reasons, vertical integration causes great concern to competition authorities. A number of consumer products markets with vertical ties have caused such disquiet to the UK's Office of Fair Trading (OFT) in recent years that they have been referred to the Monopolies and Mergers Commission (MMC) for further investigation. These include beer, petrol and soft drinks. The three cases illustrate the nature and importance of the strategic advantage derived from vertical integration. They also illustrate the concern competition authorities feel about vertical integration, and provide lessons for firms regarding the objections that may be raised towards their trading arrangements.