Vertical Integration

Vertical integration is the merger of firms at different stages of a supply chain — or of firms each controlling one complementary component — into a single entity. The merged firm maximises joint profit on the total price, $\max_P P(A-P)$, which is exactly the integrated-monopolist problem. This internalises the Pricing Externality and reverses Double Marginalization.

When to use

Cite vertical integration as the canonical remedy for double marginalization. In the lecture's two-firm example with $A=9$, integration lowers the total price from $6$ to $4.5$, raises quantity from $3$ to $4.5$, and increases total profit from $18$ to $20.25$ — Pareto-improving for firms and consumers. The caveat for an exam essay: integration can raise other antitrust concerns (market foreclosure), so it is efficiency-enhancing in this context but not unambiguously welfare-improving in every context.