In theory, in an economy consisting of a number of regions, trade for a homogeneous

commodity takes place between any two regions if the price in the importing region equals the
price in the exporting region plus the per unit transfer cost between the two. This can happen
only when there is free flow of goods and information - and thus prices across regions, and the
economy is said to be well integrated (Sexton et al, 1991). Cournot and Marshall initially
proposed this idea, when they suggested that two regions are in the same economic market
for a homogeneous good if the prices for that good differ by exactly the interregional
transportation cost. The failure of two or more of these regions to adhere to this one price
prescription may either be due to them being autarkic markets, or there are impediments to
efficient arbitrage such as trade barriers, imperfect information or risk aversion. Or it may
also be explained by the presence of imperfect competition in one or more of the markets like
oligopolistic pricing, or presence of monopolistic element(s). Information therefore on
market integration may provide specific evidence as to the extent of the competitiveness of the
market.

Market Integration

Markets are said to be integrated if they are connected by a process of arbitrage. A well
integrated market system is central to a well functioning market economy. The economic
proposition of integration is that an element of efficiency is attainable in the unified operation
than in the independent actions. According to McDonald (1953), “the integrated economy is
one in which various economic processes are so functionally related to every other processes
that the totality of separate operation form a single unit of production with characteristics of its
own. He gave some of the signs of integration as below: (a) Many diverse, specialized and
independent economic processes or operations, none of which is complete or self sufficient. (b)
A system of relationship between the various processes which serves to register this
interdependence upon the conduct of each process so that all are caused, in some manner to
fall under the overall plan. (c) A concatenation of processes in unified pursuance of the aims
and purposes of the larger scheme of things. (d) A mutual replenishment to spent resources to
the end that the continuity of each and all processes shall not be jeopardized”. Distribution of
productive resources in proper manner is the essential part of integration. An efficient
management of the overall industry is the idea behind integration so that the economy can
serve for 26 the well-being or betterment of society. Market integration is considered to be a
useful parameter to measure marketing efficiency for temporal and spatial analysis. Horowitz
(1981) said that it defining market integration on the basis of price determination is common in
economics. Significance of the concept of market integration will be clear if one understand the
view of Dercon (1995). He states that "Market integration analysis can assess the transmission
speed of price changes in the main market to the peripheral markets. A reduction in the time
lag of transmitting price signals suggests better arbitrage and therefore an improvement in the
functioning of markets". Market integration is the phenomenon by which price
interdependence takes place. As per Faminow and Benson (1990) integrated markets are those
where prices are determined interdependently; which is assumed to mean that price change in
one market affect the prices in other markets. Goodwin and Schroeder (1991) described that
markets that are not integrated may convey inaccurate price information which might distort
producer marketing decision and contribute to inefficient product movements. What market
integration delivers to the economy will be clear from the following views. Information on
market integration presents specific evidences as to the competitiveness of the market, the
effectiveness of arbitrage (Carter and Hamilton, 1989) and the efficiency of pricing (Buccola,
1983). Monke and Petzel (1984) defined, “integrated market in which prices of differentiated
products do not perform independently. Spatial market integration refers to a situation in
which prices of a commodity in spatially separated markets move together and price signals
and information are transmitted smoothly across the markets. Spatial market performance can
be evaluated by the knowing relationship between the prices of spatially separated markets
and spatial price behavior in regional markets may be used as a measure of overall market
performance (Ghosh, 2000)”. 27 Another definition given by Behura and Pradhan (1998)
described, “market integration as a situation in which arbitrage causes prices in different
markets to move together. Here two markets are said to be spatially integrated; when even
trade takes place between them, if the price differential for a homogeneous commodity equals
the transfer costs involved in moving that commodity between them. Equilibrium will have the
property that, if trade takes place at all between any two places which are physically separated,
then price in the importing area equals price in the exporting area plus the unit transport cost
incurred by moving between the two”. If this holds then the markets can be said to be spatially
integrated as per Ravallion (1986). According to Slade (1986), “two trading localities are
integrated if price changes in one locality cause price changes in the other. The transmission
machinery could be that price increases in one location result the product moving into that
location from the other, hence reducing the supply of product in the exporting region and
causing price to increase. Hence, an interrelated or interdependent movement of prices
between spatially separated markets can be said to be a situation of market integration”.
Several statistical techniques are in use to test the nature and intensity of market integration.

Vertical integration is a competitive strategy by which a company takes complete control over
one or more stages in the production or distribution of a product. A company opts for vertical
integration to ensure full control over the supply of the raw materials to manufacture its
products. It may also employ vertical integration to take over the reins of distribution of its
products. Example is the Carnegie Steel Company, which not only bought iron mines to ensure
the supply of the raw material but also took over railroads to strengthen the distribution of the
final product. The strategy helped Carnegie produce cheaper steel, and empowered it in the
marketplace. Advantages of vertical integration

Benefits of vertical integration

 Smoothen its supply chain (by ensuring ready supply of tyres and electrical components
in the exact specifications that it requires)
 Make its distribution and after-sales service more efficient (by opening its own
showrooms)
 Absorb for itself upstream and downstream profits (profits that would have gone to the
tyre and electrical companies and showrooms owned by others)
 Increase entry barriers for new entrants (by being able to reduce costs through its own
suppliers and distributors)
 Invest in specific functions such as tyre-making and develop its core competencies

Disadvantages of vertical integration

 The quality of goods supplied earlier by external sources may fall because of a lack of
competition.
 Flexibility to increase or decrease production of raw materials or components may be
lost as the company may need to sustain a level of production in pursuit of economies of
scale.
 It may be difficult for the company to sustain core competencies as it focuses on the
integration of the new units
Horizontal integration, as we have seen, is a company’s acquisition of a similar or a competitive
business—it may acquire, but it may also merge with or takeover, another company to
strengthen itself—to grow in size or capacity, to achieve economies of scale or product
uniqueness, to reduce competition and risks, to increase markets, or to enter new markets.
Advantages of horizontal integration
Economies of scale: The bigger, horizontally integrated company can achieve a higher
production than the companies merged, at a lower cost.
Increased differentiation: The company will be able to offer more product features to
customers.
Increased market power: The new company, because of the merger of companies, will become
a bigger customer for its old suppliers. It will command a bigger end-product market and will
have greater power over distributors.
Ability to enter new markets: If the merger is with an organisation abroad, the new company
will have an additional foreign market.
Disadvantages of horizontal integration strategy
As touched upon earlier, the management of a company should be able to handle the bigger
organisation efficiently if the advantages of horizontal integration are to be realised.
The legal ramifications will have to be studied as there are strict anti-monopoly laws in many
countries: if the merged entity threatens to oust competitors from the market, these laws will
be used against it.
Standard Oil, which was seen as a powerful conglomerate brooking no competition, was split
up into over 30 competing companies in an anti-trust case.
As a company grows bigger with horizontal integration, it might become too rigid, and its
procedures and practices may become unfriendly to change. This could prove dangerous to it.
Moreover, synergies between companies that may have been predicted may prove elusive or
non-existent (for example, the failed horizontal integration of hardware and software
companies merged in the expectation of “synergies” between their products).
The decision whether to employ vertical or horizontal integration has a long-term influence on
the business strategy of a company.
Each company will have to choose the option more suitable to it, based on its unique place in
the market and its customer value propositions. A deep analysis of its strengths and resources
will help it make the right choice.
 I. Definition of Market Integration. According to the Cambridge Business English
Dictionary, Market Integration isa situation in which separate markets for the same product
become one single market, for example when an import tax in one of the market is removed.
Integration is taken to denote a state of affairs or a process involving attempts to combine
separate national economies into larger economic regions (Robson, 1998, p.1) Free Trade
wherein international trade (the importation and exportation) left to its natural course without
tariffs and non-tariff trade barriers such as quotas, embargoes, sanctions or other restrictions.

Tariffs-taxes or duties to be paid on a particular class of imports or exports. Embargo - a

government-instituted prevention of exports to a certain country. Official ban on trade or other
commercial activity. (The UnitedStates has imposed several long-running embargoes on
other countries including Cuba,North Korea and Iran) Economic sanctions - commercial and
financial penalties applied by one or more countries against a targeted country, group, or
individual.

Free Trade Areas - a group

of countries within
which tariffs and non-tariff
trade barriers
between the members are
generally abolished but
with no common trade
policy toward non-
 members. Both in the
sense of geography and
price, is the foundation of these
trading agreements.
However, tariffs are not
necessarily
completely abolished for all
products.
Free trade areas impose
exclusivity among its
members since the world is not
entirely a free trade
economy.
Free Trade Areas - a group of countries withinwhich tariffs and non-tariff trade
barriersbetween the members are generally abolished butwith no common trade policy
toward non-members. Both in the sense of geography andprice, is the foundation of these
trading agreements.However, tariffs are not necessarilycompletely abolished for all
products.Free trade areas impose exclusivity among itsmembers since the world is not
entirely a free tradeeconomy.

Association of Southeast Asian Nations FreeTrade Area (AFTA) The original members
were Brunei, Indonesia,Malaysia, Philippines, Singapore andThailand. Four countries have
subsequentlyjoined: Vietnam, Laos, Myanmar andCambodia The AFTA was signed in
January 1992 inSingapore. The bloc has largely removed all export andimport duties on items
traded between thenations. It has also entered into agreements with anumber of
other nations, including China,eliminating tariffs on around 90% of importedgoods. The AFTA
nations had a combined GDP of US$2.3 trillion in 2012, and they're home to600 million people.