Review of Industrial Organization 20: 61–79, 2002.
© 2002 Kluwer Academic Publishers. Printed in the Netherlands.
Impact of Vertical Mergers on Industry
Proﬁtability: An Empirical Evaluation
Department of Agricultural, Food & Resource Economics Rutgers University, New Jersey, U.S.A.
Abstract. Vertical integration has become an important business strategy to respond to the needs of
a consumer-driven marketing system. Although one of the perceived beneﬁts of vertical ownership
integration is improved proﬁtability of the integrated ﬁrm, empirical literature mostly ignores this
issue. Using a sample of U.S. food manufacturing industries, this study examines the impact of
vertical mergers on proﬁtability. Findings show that vertical mergers negatively impact proﬁts. This
may be due to the failure of vertical mergers to create differential advantages, such as cost savings,
for the integrated ﬁrm.
Key words: Industry proﬁtability, market performance, mergers, vertical integration.
The need for a closely coordinated production-marketing system is becoming in-
creasingly more important as marketing systems become more and more consumer-
driven. Increased coordination allows ﬁrms along the production-marketing chain
to be more responsive to the changing consumer demand and market environments.
The constant pressure to meet customer demands and the need to be competit-
ive while staying proﬁtable have provided added motivation to search for a more
closely coordinated marketing. Rooted in the concept of supply chain management,
vertical integration is championed as the solution to such coordination problems.
Essentially, there are two types of vertical integration: contract integration and
ownership integration (or vertical mergers). Contract integration exists when a ﬁrm
establishes a legal commitment that binds the producer to certain production and
marketing practices. Contract integration requires that the producer (e.g., a farmer)
sell the product to the integrated ﬁrm (e.g., a food manufacturer). Vertical mer-
ger exists when single ownership extends to two or more levels of the marketing
system. A manufacturer selling its products through its own retailing outlet or a
distributor of electricity that owns its own power generating plants are examples of
The industrial organization literature clearly establishes the motivation for ver-
tical integration, either as an ownership integration or some type of contractual
coordination between different stages of production. According to Williamson