What is vertical and horizontal consolidation?
Horizontal and vertical consolidation are ways in which businesses can try to expand. In horizontal consolidation, a firm buys its competitors. It buys other companies that make the same sorts of products so that it increases its market share and decreases its competition. By contrast, vertical consolidation involves buying firms up or down the supply chain. In such a case, a firm would buy companies that provide it with the materials it needs to produce its goods. It might buy stores that sell its goods. Either way, it is buying firms that did not compete with it but which were part of making or selling the product it made originally.
Vertical consolidation and horizontal consolidation are ways for businesses to reduce competition. With horizontal consolidation, competing companies merge into one big company. If five oil companies are competing against each other, and they merge into one big company, this reduces or eliminates competition. These competing businesses may agree to merge, or they may be bought out by one of the competing companies. This allows the bigger company to control supply and possibly raise prices.
Vertical consolidation is when one company controls every aspect of a specific industry. For example, a company that specialized in the meat industry would control the cattle ranches, the slaughtering houses, the packaging plants, and the vehicles that deliver the meat to the stores. In this situation, one company has total control over every aspect of the industry. This allows that company to control the supply of the products, which will affect the prices that can be charged.
Both horizontal consolidation and vertical consolidation are business techniques that reduce competition and benefit the business owners.
When you are looking at vertical or horizontal consolidation you are looking at business actions for different ways that companies can merge.
When you are looking at vertical consolidation, you are looking at companies that are involved in the production of particular product (anywhere from the company that has the raw material to the company that retails the product) that have merged into one company. An example of vertical consolidation would be a large studio such as NBC acquiring a local TV station that airs NBC shows.
When you are looking at horizontal consolidation, you are looking at companies that are competing for the same customers and that merge to reduce competition. An example of this would be when two cable companies merge to form one new cable company.