ECONOMIES OF INTEGRATION VERSUS BUREAUCRACY COSTS - DOES VERTICAL INTEGRATION IMPROVE PERFORMANCE

This study tested links between vertical integration, cost structure, and performance at the line-of-business level of analysis. Major findi ngs were (1) Vertical integration results in economies even after indu stry effects and economies of scope and scale are controlled. Vertical ly integrated lines of business economized on general and administrati ve, other selling, advertising, and R&D expenditures but had higher pr oduction costs and thus only marginally better profitability than noni ntegrated lines of business in the same industry. (2) The higher produ ction costs were linked to backward vertical integration, suggesting i nsulation from market pressures and lack of incentive to manufacture t he lowest cost inputs. Forward vertical integration was associated wit h lower transaction-related costs. Thus, evidence of both efficiency e ffects and bureaucratic costs emerged, with the benefits of vertical i ntegration slightly outweighing its costs.