MARKET INTEGRATION

Market integration is a term that is used to identify a phenomenon in which markets of goods
and services that are somehow related to one another bring to experience similar
patterns of increase or decrease in terms of the prices of those products.
The term can also refer to a situation in which the prices of related goods and services
sold in a defined geographical location also begin to move in some sort of similar pattern
to one another. At times, the integration may be intentional, with a government
implementing certain strategies as a way to control the direction of the economy. At other
times, the integrating of the markets may be due to factor such as shifts in supply and
demand that have a spillover effect on several markets. The spillover effect is when an
event in a country has a ripple effect on the economy of another, usually more dependent
country. For example, if consumer spending in the United States declines, it has spillover
effects on the economies that depend on the U.S. as their largest export market. The larger an
economy is, the more spillover effects it is likely to produce across the global economy.

Market integration may occur with just about any type of related markets. With a stock
market integration, similar trends in trading prices for assets related to a given industry may be
found in two or more markets around the world. In like manner, financial market integration may
occur when lending rates in several different markets begin to move in tandem with one
another. In some cases, the integration within a nation may involve the emergence of similar
patterns within the capital, stock, and financial markets, with those trends coming together to
exert a profound influence on the economy of that nation.

When a market integration exists, the events occurring within two or more markets are exerting
effects that also prompt similar changes or shifts in other markets that focus on related goods.

For example, if the demand for baby dolls within a given geographical market were to suddenly
be reduced by 50%, there is a good chance that the demand for baby doll clothing would also
decrease in proportion within that same geographical market. Should the baby market increase,
this would usually mean that the market for doll clothing would also increase. Both markets
would have the chance to adjust pricing in order to deal with the new circumstances
surrounding the demand, as well as adjust other factors, such as production.

Market integration can often be a very positive situation, especially if the emerging pattern
regarding pricing is indicative of an increasingly prosperous economy. At the same time,
assessing integration between markets can also be a useful tool in identifying trends that are
less than desirable, and having the chance to begin reversing those trends while there is still
time. For this reason, financial analysts as well as economists will often monitor activity in
related markets, identify any signs of integration and make recommendations on what
strategies could be used to make the most of the emerging situation.
The existence of one price in two markets indicates the degree of price transmission and the
speed at which information travels between two markets. Well integrated markets have very
similar prices the difference being just the cost of transportation of the commodity from one
market to another. If markets are integrated, they ideally have the following features:

There will be some difference in the prices, no doubt, but changes in the price in the two
markets will again be similar and in the same direction, that determines the degree of
integration. On the other hand, a segmented market is one where the terms of transaction are
influenced by the location of the buyer and the seller, much more than the transportation costs
of moving the goods from one market to another.

Market Integration is the coordination among the firms in the market

Market Integration:

 The integration among markets influences the conduct of the firms and sometimes even
the market as a whole.
 It is usually done by the firms to enhance their efficiency in the market.
 It is not done on a regional basis, as firms can be situated far away from each other.
 It helps in removing transaction cost, and improves security of supply.
 Advantages:
 It fosters competition, which results in better products.
 Removing transaction costs helps in wealth generation.
 Better decisions for the market could be taken.

What is Market Integration?

Kane Dane

Market Integration.

Information travels quickly.

Demand and supply in the two markets adjust very quickly due to efficient mobility of goods.

Price adjustment in the two markets also takes place freely and quickly.
The differences in the market arrivals and pried are of two types: Temporal and Spatial
Variation. Temporal variations take place over time and comprise of cyclical, seasonal and
sonic irregular changes. The most important is the seasonal one which takes place once a year,
as we see prices fall at the time of harvest and rise in the off season.

The consumers and producers must know about the seasonal and cyclical variations, so that
they can plan sale and purchase accordingly. With the help of storage facility, the farmers can
avoid selling the farm products at the time of harvest, when their prices mostly fall.

Temporal Variations refer to the variations in different physically separate markets, differences
being due to location of the production center and the market. The prices in different markets
are dependent upon the nature and degree of competition, dissemination of market information
and attitude of the market functionaries.

In an efficient market system, the wholesale prices in different markets are closely related. Such
analyses help us to understand the efficiency of the marketing-system and form the policy to
improve the marketing system’s efficiency and achieve market. integration.

In India, the transportation system is good and it is found that the different markets in the
country are well linked, the differences in prices being due to the high transportation costs,
distribution margins, etc. The commodity markets and state markets do show spatial market
integration, even though prices differ. Better market integration can be achieved by the following
policy initiatives:

Removal of taxes like the octroi and other indirect taxes.

To minimize the fluctuations in prices and hedging risks by enlarging the futures market.

Phase out the subsidies on goods and PDS as they distort the market prices and to see that the
Fair Price shops sell at full market price to ensure economic viability.

States must be free to set up public or joint venture companies to procure food, for
transportation and distribution of food at commercially viable markets.
Encourage private agencies in area of food procurement.

Make rail transport cheaper and better by removing the distortions in tariff policy for freight
movement.

Allow FDI in retailing so that competition, economies of scale and improved efficiency in supply
chain would lower prices.

Government to make policy for universal access of commercial fuel at affordable rates.

What is Horizontal Integration? The definition

Horizontal Integration is a strategy that a company adapts when it seeks to offer its
products or services in different markets in order to strengthen its position in the industry.
This can be done by either merging with or acquiring another company that produces or
offers the same services.

The Horizontal Integration strategy can lead to a business monopoly, as with this strategy it
is possible to capture and cover the provision of services, reduce competition, achieve high
economic profitability and access new markets.

Such horizontal mergers or acquisitions reduce competition from new potential rivals or
from already established rivals that wish to acquire the company. At the end of the 1990’s
this business strategy was experimented with, and adopted by banks and insurance
companies.

In many cases, companies adapt this strategy for either one of the two reasons below:

 The company seeks to increase its marketing coverage through subsidiary firms
or to offer this service for sale or in different market segments
 The company establishes several branches in different parts of the city or
country where similar products are offered
Horizontal Integration as a production strategy

Horizontal Integration can be beneficial for companies that want to cover different
markets. Such companies can take advantage of their knowledge and experience to
establish themselves in different sectors and thus have wider opportunities in their
portfolio of offerings.

The company Apple is an example of this since it took advantage of its intelligence in the
manufacture of telephone products (iPhone) to open up new markets such as tablets.
These days Apple is one of the biggest companies in the world in terms of having access to
various markets in the world of technology.
With the above the company seeks to increase the size of the company, achieve a large
scale economy and reduce competition in the same industry. The Horizontal Integration
strategy is most effective when:

1. The competitors lack abilities and knowledge that the company already
possesses (competitive advantage)
2. The organization has sufficient financial resources to manage mergers and
acquisitions
3. The company has technological capacity, human talent and other resources to
complement the merger
Advantages of Horizontal Integration

Using the Horizontal Integration strategy, organizations can take advantage of the following
advantages

 Reduces competition in the sector

 New distribution channels are taken advantage of as a result of merging with
other companies
 Strengthens market positioning
 Complements the existing product portfolio rather than creating a new brand
from scratch
 Increases the company’s negotiating power with its customers and suppliers
 Reduces costs for international trade
 Increases in the organization’s income
These advantages of Horizontal Integration can lead to the growth of partnerships in R&D,
production, offering of products and services and more. The result is a stronger
commercial position on the market.

Business examples of Horizontal Integration

One of the companies that implements the Horizontal Integration is GAP Inc., a textile sales
corporation. GAP Inc. controls three different companies: Banana Republic, Old Navy, and
the mentioned GAP brand.

Each company has stores that sell garments designed to meet the needs of different
groups. Banana Republic sells higher-cost clothing with a high-end image, GAP stores sell
moderately priced clothing that targets men and women of all ages, and Old Navy sells
affordable clothing especially to children and youth, but not excluding other ages.

Using these three companies, GAP Inc. has been very successful in controlling a large
segment of retailing in the textile sector.
Other examples of companies with Horizontal Integration

One of the most important goals of any commercial company is growth.

Companies seek for growth because that will lead to a greater control and power over the
market and competition. In an already successful organization, the goal can be to achieve
market dominance.

To achieve that goal it’s likely they will acquire or merge with another company to become
much more competitive and achieve a stronger position in the market environment. It is
not surprising that major companies within each industry own a number of other brands.
In some cases companies even tend to become a market monopolist if they were not
controlled externally.

An example of which is Mattel. Mattel is the world’s leading toy company. The company
acquired several brands throughout the years. The most important acquisition was the
purchase of Fisher-Price in 1993. Likewise, Hasbro, the second largest toy company in the
market, had taken over brands such as Milton Bradley and Playskool.

Horizontal Integration Example : Coca-Cola Acquiring Juice Brands

As part of their Horizontal Integration strategy, Coca-Cola acquired del Valle in 2007.

This was one of the main Mexican juice companies, with the objective of expanding its
beverage portfolio mainly in Latin America. In this way, Coca-Cola was able to cover other
fronts by taking over the manufacture of substitute products such as energy drinks in the
first instance as occurred with the launch of Powerade and juices.

For powerful companies like Coca-Cola this happens on a regular basis.

Horizontal Integration Example : Disney Acquiring Pixar

In 2001 and 2004, Pixar had conflicts with Disney because the terms of collaboration for
the films were not agreed upon. Pixar wanted Disney to only distribute the films and
completely cede production control and marketing rights to the films. Having problems for
several years, they broke off relations in 2004.

In 2005, Disney’s new president, Robert Iger, investigated Disney’s financial situation and, in
light of the popularity of Pixar’s films, consulted with the company’s board and
shareholders regarding a possible acquisition of Pixar.

In 2006 Disney announced the purchase of Pixar for 7.4 billion USD. The acquisition did not
involve a merge of names, but did involve Walt Disney Studios as a subsidiary and The Walt
Disney Company as owner.
Horizontal Integration Example : Facebook Acquiring Instagram

In 2012, Facebook bought Instagram for $1 billion in cash and stock with the intention to
keep Instagram management independent. The acquisition business was officially closed at
the price of $300 million in cash and 23 million shares.
Disadvantages of Horizontal Integration

 Synergies with other companies do not always produce the expected added
value for the organization
 Legal implications. Horizontal integration can lead to a monopoly which is
discouraging for many governments due to the lack of competition from other
organizations
 Reduced flexibility. Large companies are more difficult to manage as they are
less flexible in introducing new products to the market
 Potential problems with organizational culture and leadership styles when
merging companies
While Horizontal Integration is an opportunity for business expansion, it can also face great
challenges, such as the creation of monopolies, complex management situations,
coordination and even the organizational culture within the company, since changes can be
great among employees due to the merger of the company.

Apart from Horizontal Integration, there is also Vertical Integration. Vertical Integration is
the opposite from Horizontal Integration, and it models the style of ownership and control.
The companies are united by a hierarchy and share the same owner, in order to generate
synergies within the organization that are governed by the same management in the
search for greater profits from their primary target sector.

An example of this type of company are various companies within the oil-industry. This
type of company can have the control of exploration, drilling, production, transportation,
refining, commercialization, distribution, etc.

With these complementary activities the company pursues a common objective e.g. a
greater market share.

Three types of Vertical Integration

 Backwards vertical integration: when the company creates businesses that

produce the raw material
 Forward vertical integration: when the company buys or builds businesses in
which to distribute its product/service
 Compensated vertical integration: subsidiaries are established that supply raw
materials and at the same time distribute the product
Vertical Integration aims to reduce manufacturing and production costs, create economies
of scope, make better use of resources and have greater control and planning from the
beginning to the end of the value chain, reducing dependence on intermediaries and thus
having a single owner who has activities in different phases of the industry in which the
company is. Companies seek to have greater control over the competition.

Differences between Horizontal Integration and Vertical Integration

A company using Horizontal Integration merges or acquires other companies that produce
or provide the same services with the goal of generating market positioning.

With Vertical Integration, expansion actions are developed in new business operations in
the various production and distribution processes of the company.

To better understand the differentiation of these two business strategies, read below the
practical example of two organizations that make transformation decisions for the
company.

Horizontal Integration example

A restaurant wants to expand, however, instead of starting from scratch at another

location in the city, it merges with another restaurant since this restaurant has been in
business for a long time and is recognized by its customers.

Vertical Integration example

A supermarket company wants to offer the possibility of home delivery to its customers,
however, instead of hiring a food transport company, it establishes its own distribution
carts to carry their products.

Horizontal Integration summary

Companies that use Horizontal Integration want to achieve the positioning of the company
at the level of territorial expansion. They make the decision to merge or acquire other
similar companies.

This is profitable when they are to start business in different countries or locations of which
you do not have sufficient knowledge. Utilizing these kind of opportunities can come with
great benefits. Companies using Horizontal Integration get access to information on clients,
the market and the complete environment in which the company is operating.

This helps the organization to achieve its desired commercial position within the market.
Horizontal Integration is also a competitive strategy that can create economies of scale,
increase market power over distributors and suppliers, increase product
differentiation and help enter new markets. By merging two businesses there is a higher
chance to generate increased revenues than the revenue that could be generated by either
one of the merged organisations. What Is a Conglomerate Merger? A conglomerate merger
is a merger between firms that are involved in totally unrelated business activities. These
mergers typically occur between firms within different industries or firms located in
different geographical locations. Conglomerate mergers are mergers of two business firms
engaged in unrelated business activities. The two firms are not two competitors merging as
in horizontal mergers. They are also not a buyer and seller merging as in vertical mergers