Corporate Integration

Corporate integration can be broadly categorized into vertical integration and horizontal
integration. The former refers to the integration of different collaborating companies involved in
the production and logistics process of products and services, such as absorbing component
suppliers or distribution companies. On the other hand, the latter involves the integration of two
or more companies with similar scales and levels of product and service production, leading to an
expansion in business size.

Corporate Integration, Monopoly, and Loss of Welfare

Corporate integration, whether vertical or horizontal, leads to the emergence of giant dinosaur-
like companies in a single market. Consequently, the market structure changes to a monopoly,
prompting regulatory measures to be implemented in relation to corporate integration and
monopolistic market structures in all countries worldwide. In Korea, the Fair Trade Act is in place,
while the United States has anti-trust laws, and the European Union enforces competition laws as
the basis for regulating monopolies.

If we were to illustrate this relationship in a graph, it would look as follows.

Pm Em

Pc Ec

MC D

MR

O Qm Qc Q

Through corporate integration, the market transitions from perfect competition to monopoly,
which means that the market equilibrium moves from Ec to Em. This is because all firms maximize
profits at the point where their marginal cost (MC) curve intersects with their marginal revenue
(MR) curve. In the graph, the monopolistic firm sets its production quantity to match at point a,
where MR and MC intersect. At this production level (Qm), the quantity is lower than Qc in a
perfectly competitive market, and the price (Pm) is higher than Pc. As a result, social welfare
decreases by the amount of aEmEc.

Cost Reduction through Corporate Integration

However, does corporate integration always lead to a loss in social welfare as mentioned above?
The answer is "no." Corporate mergers or acquisitions often aim to achieve efficiency gains
through cost reduction. In cases where corporate integration leads to cost savings in production,
there can be instances where social welfare actually increases. In such cases, the social cost of
monopoly is smaller than the social benefit, making monopoly desirable.

If we were to illustrate this on a graph, it would look as follows:

Pm Em

Pc Ec

MC1 MC2 D

O Qm Qc MR Q

When corporate integration causes the firm's marginal cost curve to shift from MC 1 to MC2, the
profit-maximizing point shifts from a to b. At this new equilibrium point, the market reaches E C,
which is the same as the equilibrium in a perfectly competitive market.

Examples of Efficiency Gains through Corporate Integration

Tesla, in the United States, is a notable example of a company that has achieved cost reduction
through vertical integration, particularly in the production of batteries. This is referred to as the
"Gigafactory." Therefore, it is important not to overlook the fact that corporate integration does
not always result in a loss of social welfare.