Market Integration

❖ Markets are said to be integrated if they are connected by a process of arbitrage.

(arbitrage- is the practice of taking advantage of a price difference between two or
more markets. Arbitrage describes the act of buying a security in one market and
simultaneously selling it in another market at a higher price, thereby enabling
investors to profit from the temporary difference in cost per share.)
❖ A well-integrated market system is central to a well-functioning market economy.
❖ The economic proposition of integration is that an element of efficiency is attainable
in the unified operation than in independent actions

Market Integration defined by different people:

According to McDonald (1953):

✓ The integrated economy is one in which various economic processes are so
functionally related to every other process that the totality of separate operation forms
a single unit of production with characteristics of its own.
• Many diverse, specialized and independent economic processes or operations,
none of which is complete or self-sufficient.
• A system of relations between the various processes which serves to register
this interdependence upon the conduct of each process so that all are caused,
in some manner to fall under the overall plan.
• A concatenation of processes in unified pursuance of the aims and purposes
of the larger scheme of things.
• A mutual replenishment to spent resources to the end that the continuity of
each and all processes shall not be jeopardized”.

Faminow and Benson (1990):

✓ Integrated markets are those where prices are determined interdependently; which is
assumed to mean that price change in one market affects the prices in other markets.
Goodwin and Schroeder (1991):
✓ Described that markets that are not integrated may convey inaccurate price
information which might distort producer marketing decisions and contribute to
inefficient product movements.

Carter and Hamilton, 1989:

✓ Information on market integration presents specific pieces of evidence as to the
competitiveness of the market, the effectiveness of arbitrage.

Monke and Petzel (1984):

✓ Integrated market in which prices of differentiated products do not perform
independently.

Ghosh, 2000:
✓ Spatial market integration refers to a situation in which prices of a commodity in
spatially separated markets move together and price signals and information are
transmitted smoothly across the markets.
✓ Spatial market performance can be evaluated by the knowing relationship between
the prices of spatially separated markets and spatial price behavior in regional
markets may be used as a measure of overall market performance

Behura and Pradhan (1998):

✓ Market integration as a situation in which arbitrage causes prices in different markets

to move together. here two markets are said to be spatially integrated; when even
trade takes place between them, if the price differential for a homogeneous
commodity equals the transfer costs involved in moving that commodity between
them. Equilibrium will have the property that, if a trade takes place at all between any
two places which are physically separated, then price in the importing area equals
price in the exporting area plus the unit transport cost incurred by moving between
the two.
Slade (1986):

✓ Two trading localities are integrated if price changes in one locality cause price
changes in the other. The transmission machinery could be that price increases in
one location result in the product moving into that location from the other, hence
reducing the supply of products in the exporting region and causing the price to
increase.

Deepak 2014:

✓ An interrelated or interdependent movement of prices between spatially separated

markets can be said to be a situation of market integration.

More information about Market Integration

A. Market integration basically refers to how easily 2 or more markets can trade with
each other.

o High integration = low barriers to trade = prices are similar in these markets
o Low integration = high barriers to trade = prices fluctuate between these
markets

Foreign trade helps the integration of markets because it reduces barriers to trade
and increases fluidity between markets.

Example:
China produces toys at a cheaper price than the US. If foreign trade increased
between the two countries, toys could be sold to the US more easily, making them
more available, thus reducing price
As foreign trade increases, the price of toys will continue going down until it
matches (or almost matches) China’s toy prices (which is the lower limit). Once the
prices are similar for both markets, we can consider them integrated.
B. Simply put, market integration is a situation when products of one market match
up/catch up to the prices of another market of similar products. Basically, market
integration occurs when similar or related products/services have similar prices in
different locations due to government policy or other factors i.e. Free trade
agreements, No import Taxes for a long period of time.

Integrated markets offer goods and services across multiple channels at a sub-per
cost, broadening existing customer base and increasing revenue. Furthermore,
integration allows investors to get a return on their investment sooner since the
product can be sold in larger volumes across borders.

Example:
Suppose, the United States of America (USA) uplifts tariffs and taxes for
importing steel from Canada, the steel market of both countries can be considered as
integrated. ’Cause now, Canadian producers can sell their steel to USA buyers
incurring no extra cost. This makes the product cheaper for US buyers, as they don’t
have to incur any taxes thus allowing them to then sell steel-made goods to US
consumers at low cost.
Since, market integration occurs across different geo-locations for a sustained
period of time; its efficient implementation largely depends on Public relations
(between firms, governments etc.), high level agreements between two or more
governments to exchange goods and services at sub-per tax or no tax at all, firms’
advertisement and sales promotion, online selling, digital marketing campaigns etc.
Conglomerate Integration
- A combination of agencies or activities not directly related to each other, it operates
under a unified management. The businesses do not overlap nor are they competitors
of one another; however, they do believe that there are benefits in joining their firms.
In a conglomerate, one company serves as the primary management in a number of
smaller companies all of whom conduct business separately and independently.
Conglomerates are companies that either partially or fully own a number of other
companies.
- Conglomerates are companies that do business in multiple industries by owning
several companies. Conglomerates may be multinational corporations with branches
that are operated independently from the rest of the businesses. The management
teams of the different companies, on the other hand, report to the senior management
of the parent company.

Example:

LT Group Inc. (Lucio Tan Group)

Philippine Philippine University of Asia Fortune Central

Airlines National the East Brewery Tobacco Park
Bank Corporation Hotel

LT Group Inc. is founded by Chinese Filipino business tycoon Lucio Tan in the Philippines.
In this example, it is evident how diverse a conglomerate can be. Different and unrelated
businesses like airlines, banks, colleges, beverage company, cigarette manufacturing, hotel,
etc. are owned by one primary management system.
Advantages of Conglomerate Integration

1. Through diversification, the risk of loss lessens . – Due to the fact that different kinds
of agencies or businesses are integrated, there will be a lot and diverse opportunities
to gain from this type of market integration. The market power of the firm will increase
because the diverse products and services offered will provide the different demands
of the consumers. Also, If one business sector performs poorly, other, better-
performing business units can compensate for the losses.
2. An expanded customer base – Having an access or reach to wide variety of
consumers
3. Cross-selling of new products, leading to increased revenues - Cross-selling occurs
when you sell customers offerings that complement or supplement the purchases
they've already made. This technique will lead to increase of revenues to the
interconnected products and services offered by different stores or businesses. For
example, if you buy a cellphone or digicam, you are also advised to buy a memory
card to expand the storage of your device. So, it will be win-win situation for the both
businesses.
4. Acquisition of financial leverage – If one of the firms experienced financial conflicts,
the management system could help to lend money through the help of the other
merged businesses or companies. They could help each other to grow and develop
their businesses.

Disadvantages of Conglomerate Integration

1. Diversification can shift focus and resources away from core operations, contributing
to poor performance. – Merging unrelated businesses or agencies could be
complicated because there will be different policies for each kind. Due to this merging,
it is not possible to just focus on a single business which could lead to loss of
 efficiency in its products and services. So, it is necessary to have a great management
system.
2. It can be challenging for firms to successfully develop a new corporate culture – There
will be clashing of cultures between the different industries, businesses, or agencies.
The firm should successfully develop a new corporate culture in which the behaviors
and values align with the mission and vision of the said new firm.

Horizontal Integration

Horizontal integration is the process of a company increasing production of goods or services

at the same part of the supply chain. A company may do this via internal expansion,
acquisition or merger.

- Is the merger of two or more companies that occupy similar levels in the production
supply chain. However, they may be in the same or different industries.
- Is when a business grows by acquiring a similar company in their industry at the same
point of the supply chain.
- The purpose of horizontal integration (HI) is to grow the company in size, increase
product differentiation, achieve economies of scale, reduce competition or access new
markets. When many firms pursue this strategy in the same industry, it leads to
industry consolidation
- A competitive strategy that can create economies of scale, increase market power
over distributors and suppliers, increase product differentiation and help businesses
expand their market or enter new markets.
- The advantages of horizontal integration are economies of scale, increased
differentiation (more features that distinguish it from its competitors), increased
market power, and the ability to capture new markets.
Here are the most common examples of horizontal integration:

o Disney purchasing Pixar to branch into the animation market

o Heinz and Kraft merging into one company

✓ The main benefit is the huge amount of investment and capital gained from acquiring
or merging two companies. As well as the bigger growth of the company, there’s the
ability to diversify its products or services, the increased target market that these
products or services can be sold to, reduced production and the less external
competition involved.
✓ It can have general disadvantages, like the overall costs of doing a merger or takeover
and the reduction in flexibility, as merging companies tend to have a monopoly over
other companies in their industry, but one of the biggest disadvantages actually
comes down to the decreased value of the corporation itself if new marketing and
business methods are not implemented correctly or beneficially.

Vertical Integration

- Tactic in which a company owns or regulates its vendors, dealers, or distribution

outlets in order to manage its value or supply chain. Companies benefit from vertical
integration because it allows them to manage operations, reduce costs, and increase
efficiencies.

Examples:
Netflix is a prime example of vertical integration. The company started as a DVD
rental business before moving into online streaming of films and movies licensed from
major studios. Then, Netflix executives realized they could improve their margins by
producing their own original content. Today, Netflix uses its distribution model to
promote its original content alongside programming licensed from studios.
Types of Vertical Integration

1. Backward Integration - is when a company expands backward on the production path

into manufacturing, meaning a retailer buys the manufacturer of their product.
Example: Amazon, which expanded from an online retailer of books to become a
publisher with its Kindle platform. Amazon also owns warehouses and parts of its
distribution channel.
2. Forward Integration - when a company expands by purchasing and controlling the
direct distribution or supply of its products. Forward integration helps companies cut
out the middleperson by removing distributors that would typically be paid to sell a
company's products, overall profitability is improved. Example: A clothing
manufacturer that opens its own retail locations to sell its products.

Advantages:

✓ Increased competitiveness by getting products to consumers directly and quickly

✓ Improved sales and profitability by creating and selling a company-owned brand
✓ By buying large quantities of raw materials or streamlining the manufacturing process,
per-unit costs are lowered

Disadvantages:

✓ Companies can get too big and mishandle the overall operation
✓ Vertical integration costs, such as purchasing a supplier, can be important
✓ Increased amounts of debt if borrowing is needed for capital expenditures
ACTIVITY 1 :

Among the three, who do you think should Airon choose to commit to as a partner? Why?

ACTIVITY 2:

Incorporate an illustration (digital or drawing) on your chosen type.

ACTIVITY 3:

By using a Venn Diagram, differentiate the three Market Integration. You may do so by listing
the disadvantage and advantages, some examples, and definitions.