Market Integration

 

Market Integration K. ARC ARCHAN ANA A BAD-17-19

 

CONTENT

Introduction Typ ypes es of market integration integration Effect Ef fects s of marke markett integration integration types

 Advantages  Adva ntages an and d disadvantages of types of market integration. Reasons Reason s for market integ integration ration Degree of market integration Measurement Measu rement of mark market et integration integration

 

Market integration ●

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Integrati Integr ation on sh shows ows the relationship of the firm in a market. The extent of integration influences the a) conduct of the firms and consequently their b)marketing efficie efficiency ncy.. The behaviour behaviour of a highly integrated market is different different from that of a disin disintegrat tegrated ed market market.. Markets differ differ in the extent of integration and therefore,there is a variation in their degree of efficie efficiency ncy..

 

CONTD., ●

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Kohls and uhl have defined market integration as a process which refers to the ex expa pan nsi sion on of fi firm rms s by co cons nsol olid idat atin ing g additional market mar keting ing fun functi ctions ons and activities ies under a sin single gle man manage agemen ment. t.

Examples of market integration are the establishment of  wholesaling facilities by food retailers and the setting up of   another plant by a milk processor.

In each case, there is a concentration of decision making in the hands of a single single man manage agemen mentt.

 

Ty Types pes of Market Market Integration Ther Th ere e are are thre three e ba basi sic c kind kinds s of mark market et inte integr grat atio ion n 1.Horizontal integration. 2.vert 2.v ertica icall integr integrati ation. on. 3.Conglomeration.

 

Horizontal integration ●

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This occurs when a firm or agency gains control of other   fi firm rms s or ag agen enci cies es p per erfo form rmin ing g similar marketing functions at the same level in the marke marketing ting seq sequen uence ce In this type of integration, some mark rke eting agencies combine to form a union with a view to reducing their effective number  and the extent of actual competition in the market. It is advanta advantageo geous us for the membe members rs who join th the e group.

 

PARENT PARE NT AG AGRI RIBU BUSI SINE NESS SS FI FIRM RM

FIRM A

FIRM B

 

FIRM C

FIRM FI RM D

 

CONTD., ●

In most markets, there is a large number of agencies which do not not eff effectively ectively compete with with each other other.

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T his is indicative of some element of horizontal integration. ●

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It leads to reduce reduced d cost cost of mar market keting ing.. In this reduced competition possible.

 

Effects of Horizontal integration integration

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Buying out a competitor in a time bound way to reduce red uce compet competitio ition. n. Gaining larger share of the market and higher profits.  Attaining economies of scale (a proportionate saving in costs gained by an increased level of production).

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Specia Spe cializi lizing ng in the the trade. trade.

 

 Advantages of Horizontal integration (1) Lower costs. (2)) High (2 Higher er efficiency. (3) Increased product differentiation. (4) Increase Increased d market marke t power. (5) Reduced competition. (6)) Acce (6  Access ss to new markets. (7)Econo (7) Economics mics of scale. scal e. (8))Econ (8 Economics omics of scope. scope. (a proportionate saving gained by producing two or more distinct goods, when the cost of doing so is less than that of producing each separately. separately.)

(9)Int (9) Intern ernati ation onal al trade.

 

Disadv Disadvanta antages ges of the the Horizonta Horizontall integ integratio ration n (1) De Dest stro roye yed d va valu lue. e.

(2) Legal repercussions.

(an unintended consequence of an event or action)

(3) Reduced flex flexibi ibilit lity y.

 

Ver erti tica call in inte tegr grat atio ion n 2. V ●

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This occurs when a firm performs more than one activity in the sequen sequence ce of the market marketing ing proc process. ess. It is a linking together of two or more marketing process within asingle ownership.

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functions in the

firm or under a single

This type of integration makes it possible to exercise control over both quality and quantity of the product from the beginning of the production process until the product is ready forr th fo the e cons consu ume merr. It reduces the number of middle men in the marketing channel.

 

 Arrangemet of vertical integration Wholesa Whol esalin ling g of feed

Feed Fe ed mill mill PARENT AGRI BUSINESS FIRM

Transp Transport ort age agency ncy Food Foo d grains grains tra trade de

 

Contd., a) Forward integration If a firm assumes another function of   marketing which is closer to the consumption function, it is a case of forward integration. Example: wholesaler assuming the function of  retailing

 

b) Backward integration This involve This involves s ownersh ownership ip or a combin combinati ation on of  sources of supply. Example: when a processing firm assumes the function of   assembling/purchasing the produce from the villages.

 

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Balanced vertical integration The third type of vertical integration is a combination of the backward forw fo rwar ard d vert vertic ical al inte integr grat atio ion. n.

and

the

 

Vertical  Advantages of Vertic al Integration 1.It allows to invest specialized.

in

assets

that are highly

2. It give gives s more more co cont ntro roll ove overr busi busine ness ss.. 3. It allo allows ws posi positi tive ve diff differ eren enti tiat atio ion. n. 4. It requires requires lower costs of transaction transaction.. 5. It off offer ers s mor more e cost cost cont contro rol. l. 6.It ensures a high level of certainty when it comes tto o quality.

7. It provi provides des more more com compe petit titive ive advan advantag tages es..

 

Disadvantages of Vertical Integration 1. capa capaci cityty-ba bala lanc ncin ing g prob proble lems ms.. 2. brin bring g ab abou outt mo more re di diffficu ficult ltie ies. s.

3. resu result lts s in de decr crea ease sed d fle flexi xib bilit ility y. 4. cre create ate some some ba barr rrier iers s to m mark arket et en entr try y. 5. caus cause e conf confus usio ion n wi with thin in tthe he busi busine ness ss..

6. requir requires es a h huge uge amoun amountt o off money oney..

 

Effects of Vertical integration

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More profits by taking taking up up additio additional nal functions functions Risk reduction through improved market coordination Improvement in bargaining power and the prospects of influencing prices Lowering costs through achieving operational efficiency

 

3. Co Cong nglo lome mera rati tion on A combination of agencies or activities r    may, not directly related to each other  when it operates under a unified management, be termed a conglomeration.

 

AGRI -BUSINESS - BUSINESS CONGLOMERATE CONGLOMERATE

FOODGRAINS TRADE

FRUIT PROCESSING UNIT

RETAIL RET AIL CHAIN

CLOTH MILL

SALES  AND REPAIRS OF ELECTRONIC GOODS

MANUFACTURE OF VANASPATI

 

Examples ●

Hindu Hi ndust stan an unile unileve verr ltd. ltd.

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Delhi cloth and general mills.

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Birla Birl a grou group. p. Tatas. J.K.group.

ITC. And NAFED.

 

Effects of Conglomeration

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Risk reduction through diversification  Acquisition of financial financial lever leverage age Empire

 –

builildi bu din ng urge urge..

 

Reasons for market integration

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To remove transaction costs Foster competition Provide better signals for Provide for optimal optimal g generation eneration and consumption decisions. Improve security of supply

 

De Degr gree ee of in inte tegr grat atio ion n ●

Ownership integration This occurs when all the decisions and assets of a firm are completely complete ly assumed assumed by another another firm. firm. Example: a processing firm which buys buys a wholesale wholesale firm.

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Contract integration This involves an agreement between two firms on certain decisions, while each firm retains its separate identity identity.. Example: tie up of a dhal mill with pulse traders for supply of  pulses.

 

Measurement of market integration The measurement or assessment of the extent of market integration is helpful in the formation of appropriate policies forr in fo incr crea eas sing the the ef effi fici cien ency cy of ma mark rket etiing pr proc oces ess. s. The measurement or assessment of market integration may be be atte attempt mpted ed at tw two o levels. levels. 1) Inte Integra grati tion on amon among g fi firm rms s of a mar marke ket. t. 2) Integra Integratio tion n am among ong s spati patiall ally y seper seperate ated d mark markets ets..

 

Inte Integra gratio tion n among among firms firms of a mar market ket ●

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The extent of vertical integration in a market may be assessed by counting the number of functions performed by each firm in the market. The extent of horizontal integration may be measured by studying the number of firms performing the same marketing function but opera perati tin ng unde underr one one comm ommon mana anagem gement. ent. .

 

Integration among spatially sepa se para rate ted d ma mark rket ets s ●

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The extent to which prices in spatially seperated markets move together or are related to transport costs reflects the degree of integration.  A two-way analysis of prices in spatially seperated markets may be used to assess the degree of   integration. 1) Price correlatio tions. 2) Spa Spatia tiall pr pric ice e dif differ feren entia tiall and and T Tran ranspo sporta rtatio tion n cost costs. s.

 

Pr Pric ice e co corr rrel elat atio ion n ●

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The degree of correlation between two prices is taken as an index of the extent to which the two mark ma rket ets s ar are e in inte teg gra rate ted. d.  A higher degree of correlation coefficient indicates a greater degree of integration atleast in terms of the pricing of the product between market centre cen tres sa and nd vice ver versa. sa.

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p rice differential and Transportation Spatial price Transportation costs. • •

1. Correlat Correlation ion method: ●

Bivariate correlati correlations ons are est estimated imated betwen betwen time series of spot prices for a commodity from different market locations ●

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Stastically significan Stastically significantt correlation is ttake aken n to imply mark market et integration ●

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2. Ravallion Ravallion pro procedu cedurere•

extension of static correlation method extract more information than correlation method

 

3.Co integration approach.: relay on price data alone •

4. Parity Parity boun bound d models models (PBM): (PBM): •

allows transfer costs to vary between periods and thus assumes no specific model of marketing margins.