Internet companies can be vertically integrated, just as traditional businesses vertically integrate to consolidate costs and to expand corporate reach in the market.
Vertical integration occurs when a merchant or business begins to absorb the various levels above and below it in the distribution chain. The benefit for the business is a potential reduction in transactional costs and the ability to control production more directly.
For example, say a small clothing designer has vertically consolidated by purchasing a small boutique for selling his or her clothes. The designer then creates a website where he or she can immediately place clothes that go on sale. Additionally, the designer can market through his or her own website and social media accounts. In this way, overhead costs such as marketing or paying a Web designer to maintain a site are minimized.
Perhaps one of the best examples of emerging vertical integration on the Internet is retail giant Amazon. Amazon's competitors include online and traditional brick-and-mortar retailers. However, Amazon has managed to emerge as a dominant seller in many areas, such as video streaming and traditional retail items, such as clothing. Constantly seeking to integrate, Amazon has experimented with drones for delivering packages, which would eliminate reliance on delivery companies such as FedEx or UPS. This is particularly important for Amazon, which promises free two-day delivery for its Prime members.
Challenges for Internet Integration
In 2012, Nathan Wilson used gas stations as a case study on vertical integration in a paper for the Federal Trade Commission (FTC). While vertical integration offered benefits for a company, Wilson found that it ultimately also resulted in higher prices. One reason was an intentional effort by a company to increase demand for its product, according to Wilson.