Industry consolidation epitomizes the “if you can’t beat ‘em, join ‘em” cliché. Consolidation occurs when businesses serving one particular market merge together, rather than compete for profits. Of course, industry consolidation that leads toward monopoly power is controversial.
Industry consolidation is categorized into either horizontal or vertical integration. Horizontal integration combines similar firms and products within the market segment. Vertical integration consolidates companies along the same supply chain. For example, one vertically integrated oil company may have come to fruition by acquiring independent drillers, crude oil refineries and gas stations.
Industry consolidation provides for cost savings because larger companies have more buying power to purchase goods in bulk. Market research and strategy is also readily available to be shared across the larger entities.
Industry consolidation may arise when multiple smaller firms merge together within an emerging market to grow financial resources. Consolidation may also signal limited growth opportunities related to mature markets. Historically, airlines have been forced to consolidate in order to survive.
Industry consolidation should not be confused with monopoly. The Federal Trade Commission enforces laws to protect the public from price fixing and anti-competitive practices associated with monopolies.
Mergers may ignite culture clashes between firms, which reduce profitability.