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What is Horizontal Integration?
Horizontal integration is a growth strategy where a company acquires or merges with another company operating at the same level of the value chain, usually within the same industry. The goal is to increase market share, reduce competition, and achieve economies of scale.
Definition
Horizontal integration is the combination of companies that produce similar products or services, operating in the same stage of production or distribution.
Key Takeaways
- Occurs between competitors in the same industry.
- Aims to expand market power and operational efficiency.
- Often scrutinized by competition and antitrust regulators.
Understanding Horizontal Integration
Horizontal integration allows firms to consolidate operations, reduce duplicated costs, and strengthen their position in the market. By acquiring or merging with competitors, companies can increase pricing power, access new customers, and expand geographic reach.
However, excessive horizontal integration may reduce competition, leading to higher prices or reduced innovation. As a result, regulators closely evaluate such transactions to protect consumer welfare.
This strategy contrasts with vertical integration, which involves companies at different stages of the supply chain.
Real-World Example
When two airlines merge to form a larger carrier serving the same routes, the transaction represents horizontal integration. The combined airline gains a larger market share and operational synergies.
Importance in Business or Economics
Horizontal integration affects:
- Market concentration
- Pricing power
- Industry competition
- Operational efficiency
It plays a significant role in shaping industry structures.
Types or Variations
- Merger — Two firms combine into one entity.
- Acquisition — One firm purchases another.
- Strategic Alliance — Cooperative arrangement among competitors.
Related Terms
- Vertical Integration
- Merger and Acquisition (M&A)
- Market Concentration
Sources and Further Reading
Quick Reference
- Integration at the same value-chain level
- Expands market share
- Subject to antitrust review
Frequently Asked Questions (FAQs)
How is horizontal integration different from vertical integration?
Horizontal integration involves competitors; vertical integration involves suppliers or distributors.
Why do regulators review horizontal integrations?
To prevent monopolies and protect competition.
Is horizontal integration always beneficial?
Not always, it can reduce competition if not carefully managed.
