International Trade Analysis Essay Example

components, as evidenced by the Ford River Rouge Complex. Forward vertical integration entails a company managing its distribution centers and retailers responsible for distributing its products.

One example of vertical integration occurred within the Carnegie Steel company, which was one of the earliest and largest instances. This company had control over various aspects of the steel production process, including steel production mills, iron ore extraction mines, coal supply mines, iron ore transportation ships, coal transportation railroads to the factory, and coal processing coke ovens. Additionally, Carnegie focused on nurturing internal talent by developing them from entry-level positions instead of hiring from other companies. He even founded an educational institution to teach future generations about steel manufacturing processes. Another example of vertical integration can be seen in American Apparel, a fashion retailer and manufacturer that prides itself on being a fully integrated industrial company.

Located in downtown Los Angeles, the brand has control over various stages of its production process. In one building, they handle dyeing, finishing, designing, sewing, cutting, marketing, and distribution of their products. They also manage their own advertisements featuring employees and oversee their dissemination. Unlike franchising, all retail locations are owned and operated by the company itself. According to management, this vertically integrated model allows them to design, cut, distribute and sell globally within a week. The founder Dov Charney remains the majority shareholder and serves as CEO.

The company is an example of a vertically integrated corporation, controlling both production and distribution of its product. In the oil industry, multinational companies like ExxonMobil, Royal Dutch Shell, ConocoPhillips or BP, along with national companies like Petronas, often have a

vertically integrated structure. This means they are involved in every aspect of the supply chain - from locating deposits and extracting crude oil to refining it into petroleum products and distributing them through company-owned retail stations. Throughout most of the 20th century, telephone companies, especially the largest one called the Bell System, also took an integrated approach by manufacturing their own telephones, telephone cables, exchange equipment, and other supplies.

Under the leadership of Dhirubhai Ambani, Reliance Industries, the Indian petrochemical giant, has expanded its operations from textiles to various petrochemicals. They have also ventured into oil and natural gas and retail sectors. Currently, Reliance offers a wide range of products including oil and gas production, refining, petrochemicals, synthetic garments, and retail outlets. Similarly, in the 1920s to 1950s period, the American motion picture industry underwent transformation and became dominated by a few companies in what was known as a "mature oligopoly".

The Big Eight major film studios, including the Big Five studios (MGM, Warner Brothers, 20th Century Fox, Paramount Pictures, and RKO), dominated the film industry. These studios had full integration as they managed film production, distribution, and their own theaters. In contrast, the Little Three studios (Universal Studios, Columbia Pictures, and United Artists) produced and distributed feature films but did not possess theaters.

Concerns have been raised by policy makers regarding vertical integration, also known as common ownership, due to its potential for anti-competitive behavior and market influence. In the influential case of United States v. Paramount Pictures, Inc., the Supreme Court mandated that the five vertically integrated studios divest their theater chains and prohibited certain trade practices (United States v.

Paramount Pictures, Inc., 1948) [11]. Vertical integration has played a pivotal role in shaping the interaction between studios and networks and has led to alterations in financing criteria.

Networks began requiring a portion of syndication revenues from studios to include their shows on the schedule. This change prompted studios to alter their movie-making process and business practices. They now relied on independent producers, who would provide financing in exchange for distribution rights. Apple Inc. is an example of vertical integration, particularly with the iPhone and iPad ecosystem, where they control the processor, hardware, and software. Although Apple outsources the manufacturing of its hardware to contract manufacturers like Hon Hai Foxconn or Asus Pegatron, they sell their own branded products through Apple retail stores.

Problems and benefits of vertical integration can be classified into internal and external categories. These gains and losses vary depending on the industry's technological state, which corresponds to the industry lifecycle stages. In the case of static technology, the gains and losses have been extensively studied. Internal gains include lower transaction costs, synchronization of supply and demand along the product chain, and reduced uncertainty leading to greater investment. Vertical integration also provides the ability to monopolize the market throughout the chain by market foreclosure and strategic independence, especially when important inputs have rare or highly volatile prices, such as REM. However, there are also internal losses associated with vertical integration.

Higher coordination costs, higher monetary and organizational costs of switching to other suppliers/buyers, and weaker motivation for good performance at the start of the supply chain due to guaranteed sales and the blending of poor quality at later manufacturing

stages are all challenges in the supply chain. However, there are benefits to society such as better opportunities for investment growth through reduced uncertainty and local companies being better positioned against foreign competition. On the other hand, there are also losses to society, including market monopolization and a rigid organizational structure that shares similarities with the socialist economy according to John Kenneth Galbraith's works. In economics, vertical expansion refers to the growth of a business enterprise by acquiring companies that produce intermediate goods or help market and distribute its product.

The goal of expansion is to ensure the firm has the necessary supplies and market to produce and sell its product, resulting in a more efficient business with reduced costs and greater profits. Lateral expansion, which involves acquiring similar firms, is another method of achieving economies of scale. Vertical expansion, or vertical acquisition, is also used to increase scales and gain market power. One example of forward vertical expansion or acquisition is News Corporation's acquisition of DirecTV.

DirecTV, a satellite TV company, enables News Corporation to distribute its media content such as news, movies, and television shows. Comcast Cable's acquisition of NBC exemplifies backward vertical integration. In the United States, the Federal Communications Commission is responsible for protecting the public from potential communication monopolies that may arise from this practice. Vertical integration refers to a company expanding its business by owning its supplier and/or distributor along different stages of the same production path.

Vertical integration provides advantages like cost reduction, enhanced efficiency, and lower expenses for transportation and turnaround time. Nevertheless, there are instances where relying on external vendors with expertise

and economies of scale may be more beneficial than pursuing vertical integration. Investopedia classifies vertical integration into two types: backward integration, which involves a company expanding backwards on the production path, and forward integration, which entails a company expanding forward on the production path.

Examples of vertical integration include:

- A mortgage company that engages in both the origination and servicing of mortgages, meaning that it provides loans to homebuyers and also collects their monthly payments.

- A solar power company that manufactures photovoltaic products, including cells, wafers, and modules necessary for creating those products. This company would be considered vertically integrated.

- The merger of Live Nation and Ticketmaster resulted in the creation of a vertically integrated entertainment company. This company manages and represents artists, produces shows, and sells event tickets.

II. Horizontal integration is a strategy used by businesses or corporations to achieve ownership and control. It involves selling a specific product in multiple markets. Unlike vertical integration, which focuses on production, horizontal integration is more common in marketing. It occurs when a firm merges or acquires another firm within the same industry and production stage, such as two car manufacturers merging. The goal of horizontal integration is to consolidate similar companies and establish a monopoly called a horizontal monopoly. The term closely associated with horizontal integration is horizontal expansion.

Horizontal integration is when a company expands its presence in an industry it already operates in, aiming to increase market share for a specific product or service. This approach offers advantages such as economies of scale and scope, as well as establishing a strong position in the target market. In the

media sector, there has been consolidation of ownership among fewer conglomerates that operate across different media platforms and countries. Media critics like Robert McChesney have pointed out this trend, while individuals like Rupert Murdoch bring together various media ventures in central locations. Unlike traditional vertical integration seen in Hollywood studios, horizontal integration involves consolidating holdings across multiple industries. Owning diverse media outlets that deliver similar content is seen as highly efficient because minimal adjustments are needed to adapt to different forms of media.

Within a conglomerate, the content used for broadcasting television is also used for broadcasting radio. Likewise, the content used in the hard copy of a newspaper is also utilized on its online newspaper website. This has resulted in the emergence of new strategies for content development and distribution, aimed at enhancing synergy between different divisions within the same company. Studios now seek content that can seamlessly transition across various media channels.[2] III. Economies of scale refer to the decrease in average cost per unit as production quantity increases from Q to Q2, lowering the cost from C to C1.

Economies of scale in microeconomics refer to the cost advantages obtained through business expansion, resulting in lower average cost per unit with increased output. This concept, known as "economies of scale," applies to long-term reductions in unit cost when facility size and input usage levels increase [1]. Conversely, diseconomies of scale represent the opposite effect. In summary, economies of scale involve efficient practices.

The main causes of economies of scale include buying materials in bulk with long-term contracts, managers specializing more, obtaining lower interest charges from banks and having a

wider range of financial instruments available, spreading advertising costs over a larger media market output, and benefiting from production returns to scale. Together, these factors lead to a reduction in long run average costs (LRAC) by shifting the short-run average total cost (SRATC) curve downward and to the right.

The use of economies of scale contributes to the growth of companies in certain industries, impacting international trade patterns and the number of firms in a market. Learning by doing is one factor that leads to economies of scale. Furthermore, implementing free trade policies is justified because some economies of scale require larger markets than what a single country can provide. As an example, it would not be efficient for Liechtenstein to have its own car manufacturer if they only sold their products within the country.

Car manufacturers must sell cars locally and globally to be profitable. The idea of a "natural monopoly" is linked to economies of scale, but Professor John Seddon challenges the notion that larger scale results in economic advantages by applying the Toyota Production System to the service industry.

Instead of focusing on reducing unit costs, the author argues for improving the flow of a service from initial customer demand to satisfaction. Many companies inadvertently increase total costs by creating failure demand in their efforts to manage and decrease unit costs. According to Seddon, arguments for economies of scale lack solid evidence and consist of a mix of common sense and limited data.