Integration

Background

Integration in economics refers to the process by which companies combine different stages of production or various types of production processes into a unified control structure. The purpose behind integration often includes reducing costs, increasing efficiencies, improving supply chain coordination, or gaining greater power within the market.

Historical Context

The concept of economic integration dates back to the Industrial Revolution when companies began to see the benefits of controlling more than one stage of their production processes. Over the years, integration strategies have evolved, influenced by changes in technology, market conditions, and economic policy.

Definitions and Concepts

Integration: Integration, in economic terms, refers to the merging of different business activities within one organizational structure. This can be broken down into several types:

Vertical Integration: The combination of a company with one of its suppliers (backward integration) or with its distributors (forward integration).
Horizontal Integration: The merger of a company with another company that operates at the same level in an industry, often a competitor.

Major Analytical Frameworks

Classical Economics

Classical economics typically focuses on the role of the market in determining economic outcomes. Integration can be seen as a response to market failures, such as monopolies or inefficiencies in supply and distribution.

Neoclassical Economics

Neoclassical theories might focus on the efficiency under perfect competition and suggests integration may sometimes lead to achieving economies of scale, thereby improving consumer welfare.

Keynesian Economics

Keynesian economics might evaluate the macroeconomic impacts of large firms created through integration and how they affect investment, employment, and aggregate demand.

Marxian Economics

Marxian economics would analyze integration through the notion of capitalist accumulation, where capital owners try to dominate workers and production for greater surplus extraction.

Institutional Economics

Institutional economists would focus on the role of legal and organizational frameworks that facilitate or hinder various forms of integration and their broader social and economic impacts.

Behavioral Economics

Behavioral economics would evaluate how cognitive biases and organizational cultures influence the decisions for and impacts of integration.

Post-Keynesian Economics

Post-Keynesian economists might concern themselves with the effects of integration on market structures, oligopolistic behavior, and how financialisation influences corporate strategy.

Austrian Economics

Austrian economics would discuss integration in terms of entrepreneurial activity, capital structure modifications, and power relations in markets.

Development Economics

In the context of development economics, integration could be discussed as a strategy for local firms in developing countries to compete in global markets through controlling their supply chains more effectively.

Monetarism

Monetarists might analyze the role of integrated firms especially regarding control over money supply and the potential risks of inflation through market power exerted by vertically or horizontally integrated entities.

Comparative Analysis

Examining different economic frameworks provides a comprehensive view of the diversity in analytical approaches to understanding integration and its impacts on markets.

Case Studies

Standard Oil Trust’s vertical integration strategy in the late 19th and early 20th centuries.
Amazon’s contemporary horizontal and vertical integration across retail, logistics, and cloud computing.

Suggested Books for Further Studies

“The Theory of the Growth of the Firm” by Edith Penrose
“The Competitive Advantage of Nations” by Michael E. Porter
“Market Structure and Foreign Trade” by Elhanan Helpman and Paul Krugman

Backward Integration: The process by which a company expands backward on the production path, into manufacturing factors such as inputs.
Forward Integration: Taking control over the direct distribution or supply channels.
Horizontal Integration: Merging with or taking over another firm that operates at the same level of the market.
Vertical Integration: Owning and controlling multiple stages of the production or supply chain within the same company.