In simple terms
Vertical integration means a company runs more than one step of its own supply chain. Instead of buying from outside suppliers or selling through outside distributors, it owns or controls those steps itself.
A classic example is an oil company that owns wells and pipelines at one end and storage terminals and gas stations at the other.
How it works
Economists picture a supply chain like a river. Earlier stages, such as raw materials, are “upstream.” Later stages, such as distribution and retail, are “downstream.” A company can integrate in either direction:
- Backward integration: moving upstream, for example a manufacturer taking over its supplier.
- Forward integration: moving downstream, for example a manufacturer buying its distributor or opening its own shops.
Firms integrate by building new operations or through a vertical merger, in which companies at different levels of the same chain combine.
Why it matters
Integration can make a business more efficient. It can lower transaction costs, improve coordination between design and production, and remove the extra markup that each separate stage would charge. Some of those savings can reach customers as lower prices.
It can also harm competition. A firm that controls a key input might cut off rivals or raise their costs, which competition lawyers call input foreclosure. A supplier that buys a major customer might shut rival suppliers out, called customer foreclosure.
For that reason, competition authorities in the European Union, the United States and elsewhere can review large vertical mergers. EU guidelines note that such mergers are generally less likely to harm competition than mergers between direct rivals.
Where you’ll see it
- Energy companies that both produce and sell fuel.
- Business news about companies buying their suppliers or distributors.
- Competition reviews of large mergers.
- Business strategy courses and case studies.
Example
By buying the company that made its batteries, the carmaker moved toward vertical integration and gained more control over its costs.
Often confused with
Horizontal integration. That is when a company combines with rivals at the same stage, such as one manufacturer buying another. Vertical integration joins different stages of the same chain.
Key facts
- The OECD competition glossary defines vertical integration as a firm owning or controlling different stages of the production process.1
- Backward integration extends toward raw materials; forward integration extends toward distribution.1
- EU merger guidelines call a merger between a manufacturer (the upstream firm) and one of its distributors (the downstream firm) a vertical merger.2
- The same guidelines say non-horizontal mergers, including vertical ones, are generally less likely to significantly impede competition than horizontal mergers.2
- In the United States, Section 7 of the Clayton Act prohibits mergers whose effect may be substantially to lessen competition or tend to create a monopoly.3
In the news
Quick checkA clothing brand buys the factory that makes its fabric. Which kind of integration is that?Show answer
Backward vertical integration, because it moves upstream toward raw materials.
Sources
- UN Economic and Social Commission for Western Asia (ESCWA), citing the OECD Glossary of Industrial Organisation Economics and Competition Law (Khemani and Shapiro, 1993). Vertical integration. Undated (accessed 11 September 2026)
- European Commission, Official Journal of the European Union C 265. Guidelines on the assessment of non-horizontal mergers under the Council Regulation on the control of concentrations between undertakings. 18 October 2008 (accessed 11 September 2026)
- U.S. Federal Trade Commission. Mergers (Guide to Antitrust Laws). Undated (accessed 11 September 2026)
Editorially reviewed by Specialty Digest Editorial TeamLast reviewed September 11, 2026Researched and drafted with AI assistanceReport an issue