[Type here]

Republic of the Philippines

NUEVA VIZCAYA STATE UNIVERSITY
Bayombong, Nueva Vizcaya
INSTRUCTIONAL MODULE
IM No.: IM-GEWORLD-1stSEM-2022-2023

CHAPTER II: THE STRUCTURES OF GLOBALIZATION

I. LESSON TITLE:
⮚ The Global Economy
⮚ Market Integration
⮚ The Global Interstate System
⮚ Contemporary Global Governance

Lesson 2: Market Integration

Defining 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 independent actions. According to McDonald (1953), “the integrated economy is one in which
various economic processes are so functionally related to every other process that the totality of
separate operation forms 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 relations 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”.

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 affects 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 decisions 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 pieces of
evidence 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,
[Type here]
Republic of the Philippines
NUEVA VIZCAYA STATE UNIVERSITY
Bayombong, Nueva Vizcaya
INSTRUCTIONAL MODULE
IM No.: IM-GEWORLD-1stSEM-2022-2023

“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)”.

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 a 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 in the product moving into that location from the other, hence reducing the supply of
products in the exporting region and causing the 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”. (Deepak 2014)

Types of Market Integration

When two businesses are brought together through a merger or takeover, it is possible to
define the nature and type of integration based on the activities of each business and where they
operate in the supply chain of an industry.

The types of integration are illustrated in the diagram below:

The main types of integration are:

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Republic of the Philippines
NUEVA VIZCAYA STATE UNIVERSITY
Bayombong, Nueva Vizcaya
INSTRUCTIONAL MODULE
IM No.: IM-GEWORLD-1stSEM-2022-2023

1. Backward vertical integration. This involves acquiring a business operating earlier in

the supply chain – e.g. a retailer buys a wholesaler, a brewer buys a hop farm.
2. Conglomerate integration. This involves the combination of firms that are involved in
unrelated business activities.
3. Forward vertical integration. This involves acquiring a business further up in the supply
chain – e.g. a vehicle manufacturer buys a car parts distributor.
4. Horizontal integration. Here, businesses in the same industry and which operate at the
same stage of the production process are combined. (Riley 2018)

Pros and Cons of Each Type of Market Integration

The table below shows the advantages and disadvantages of each type of market
integration.

Horizontal Integration
Advantages Disadvantages
• Larger Market Share • Increasing the size of the company also
• Bigger Base of Customers increases the size of the problems, bigger
• Increased Revenue companies are harder to handle
• Reducing competition • Does not always yield the synergies and added
• Increasing other synergies such as marketing value that was expected
• Creating economies of scale and economies • Can even result in negative synergies which
of scope reduce the overall value of the business
• Reducing other production costs
Vertical Integration
Advantages Disadvantages
• Decrease transportation costs and reduce • Companies might get too big and mismanage
delivery turnaround times the overall process
• Reducing supply disruptions from suppliers • Outsourcing to suppliers and vendors might be
that might fall into financial hardship more efficient if their expertise is superior
• Increase competitiveness by getting products • Costs of vertical integration such as purchasing
to consumers directly and quickly a supplier can be quite significant
• Lower costs through economies of scale, • Increased amounts of debt if borrowing is
which is lowering the per-unit cost by buying needed for capital expenditures
large quantities of raw materials or
streamlining the manufacturing process
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Republic of the Philippines
NUEVA VIZCAYA STATE UNIVERSITY
Bayombong, Nueva Vizcaya
INSTRUCTIONAL MODULE
IM No.: IM-GEWORLD-1stSEM-2022-2023

• Improve sales and profitability by creating and

selling its own brand
Conglomerate Integration
Advantages
• Through diversification, the risk of loss
lessens.
• An expanded customer-base
• Cross-selling of new products, leading to
increased revenues.
• The new firm benefits with increased
efficiencies with the merged company.
Disadvantages
• Diversification can shift focus and resources
away from core operations, contributing to poor
performance.
• If the acquiring firm is inadequately experienced
in the industry of the acquired firm, the new firm
is likely to develop ineffective corporate
governance policies and an inexperienced,
underperforming workforce.
• It can be challenging for firms to successfully
develop a new corporate culture