Vertical integration

What are the arguments for and against vertical integration?

A vertical structure consists of an upstream firm such as a manufacturer of an intermediate good, and a downstream firm such as a wholesaler or a retailer. The down stream firm may also be a manufacturer or service provider using the intermediate good as an input. An upstream firm is said to be vertically integrated if it controls (directly or indirectly) all the decisions made by the vertical structure. The vertically integrated profit therefore refers to the maximum aggregate profit of the vertical structure (manufacturer¡¯s plus retailer¡¯s). There are many cases where the firms (and possibly the consumers) will benefit from vertical integration.

One such example is where the problem of double marginalisation exists. Consider the case where both the upstream and downstream firms have monopoly power. If vertical integration exists, the final price charged to the consumer would be pm and the quantity supp...