Partial backward integration is prevalent in many agricultural and natural
resource processing industries. A strategic rationale for partial backward
integration is developed for a dominant firm with a competitive fringe purc
hasing from competitive input suppliers. A partially backward integrated do
minant firm potentially can increase profit through production efficiency g
ains and through a lower price for externally purchased input. The optimal
degree of backward integration results when the dominant firm's profit from
exerting monopsony market power in the external spot market equals its pro
fit from producing raw input internally, less the incremental cost of acqui
ring internal raw input production capacity. Comparative statics results ar
e consistent with recent empirical studies of the beef packing industry.