So, for example Coca Cola has saturated the drinks market, and they vertically integrate by buying bottling companies... which means their competitor Pepsi can no longer buy from that bottling company because Coke has decreased competition in that market?
Here's what they teach in business school: if you have a cloud computing business, and you have an advertising business, and your cloud business wants to advertise its services, should the cloud business get a discount on the ads, maybe the ad business has some surplus capacity you could soak up for free? Nope. The cloud business taking advantage of "free" ads from your ad business will make the health of the cloud business look better than it is. It will cover up overcapacity in the ad business, hiding the poor way it is being run. To properly assess your two businesses so you can make internal investing decisions, you need a clear picture of how those two businesses are operating in their respective markets. If a competitor is selling ads cheaper than you are, your cloud business should buy them.
So, if this is how managers and cost accountants are trained to think rationally, well guess what, that's what markets are good at.
Vertical integration is part of the monopolization problem.
Maybe the bottler bottles for multiple companies. Maybe Coca Cola could redesign their own bottles to target specialized bottle-filling machines, and Coca Cola would have enough volume to use all of that bottler's capacity.
But the bottler won't invest in the machines, because they don't want to only bottle Coca Cola products. And absent that, the bottles never get redesigned and the efficient machines never get bought. And absent that, Coca Cola is more expensive than it could be.
Or maybe absent an integration, the product offering isn't what the market really wants, because it doesn't want to have to combine two things.
Vertical integration can breed efficiency.
It can also breed monopoly, but you need to address the iron man if you're making an argument.
Except in reality, the cloud business would “buy” ads from the ad business, and now you have an “expense” despite the fact that the money never went anywhere.
They "buy" the ads only on internal accounting. There's no tax deduction for that. For you to actually recognize an expense, you would also have to recognize the gain.
Here's what they teach in business school: if you have a cloud computing business, and you have an advertising business, and your cloud business wants to advertise its services, should the cloud business get a discount on the ads, maybe the ad business has some surplus capacity you could soak up for free? Nope. The cloud business taking advantage of "free" ads from your ad business will make the health of the cloud business look better than it is. It will cover up overcapacity in the ad business, hiding the poor way it is being run. To properly assess your two businesses so you can make internal investing decisions, you need a clear picture of how those two businesses are operating in their respective markets. If a competitor is selling ads cheaper than you are, your cloud business should buy them.
So, if this is how managers and cost accountants are trained to think rationally, well guess what, that's what markets are good at.
Vertical integration is part of the monopolization problem.