Growth by Vertical Integration: Integration and Concentration

In industries where administrative coordi- nation provided competitive advantages, integration brought concentra- tion. Even before 1900 a high degree of concentration could be found in many industries. Such industries became dominated by a few vertically integrated enterprises rather than by horizontal combinations of manu- facturing firms. The first to integrate continued to dominate. Only those firms adopting a similar strategy continued to compete. In such industries small, nonintegrated firms filled the interstices by providing supplementary outlets for the large integrated firms.

On the other hand, in industries where technology did not lend itself to mass production, and where volume distribution did not benefit from specialized scheduling or services, vertical integration failed to bring concentration. In the labor-intensive, low-energy-consuming industries where administrative coordination did not result in sharp reductions of unit costs, or provide services, and so create barriers to entry, vertical integration did not provide a profitable alternative to horizontal com- bination. In such industries, small, integrated enterprises continued to prosper. Textiles, apparel, leather, shoes, lumber, and furniture; printing and publishing; and industries producing simple metal tools, implements, and fabricated shapes or highly specialized machinery remained uncon- centrated. In these industries, as the history of American Woolen and Central Leather indicates, size might indeed be a handicap.

As table 9 suggests, the concentrated industries were clustered roughly in the same industrial groups as were the large enterprises. The table gives the total product value produced by the leading firms in the concentrated four-digit industries within the larger two-digit industrial categories.28 For this table the concentrated industries were defined as those in which 6 or fewer firms produced 50 percent of the total value produced or 12 or fewer manufactured 75 percent of value produced or some number of firms between 5 and 12 produced a proportionate percent of the total product. The table indicates that the value produced by the oligopolists was the smallest in groups that had the smallest number of firms capitalized at $20 million or more. On the other hand, in those groups in which the large firms clustered, the oligopolists produced a much larger share of output. Instruments is the major exception. The correlation is only an approximate one. In the 1920s and 1930s with the continued growth of the automobile and chemical industries, the value produced by oligopolists became higher in those groups. This was also the case but to a lesser extent in the paper and the stone-clay-glass groups.

As the descriptive review of the companies listed in Appendix A further emphasizes, concentration meant oligopoly rather than monopoly. There were several reasons why so few monopolies appeared. One was the result of the very process of vertical integration. As has been stressed, backward integration by manufacturers caused producers of raw materials to move forward into processing and selling. Occasionally, marketers moved back into manufacturing. Such responses by firms operating in different parts of an industry were particularly significant in oil, sugar, chemicals, iron and steel, and copper.

A second reason for oligopoly was that two or more enterprises inte- grated forward and backward simultaneously. This was the case, for example, in meat packing, cotton oil, and agricultural implements. Often, too, leading firms refused to join horizontal mergers. As mergers consoli- dated their operations, centralized their administration, and began to integrate, such independents as Westinghouse Electric, Goodrich Rubber, Wrigley’s Chewing Gum, Loose-Wiles Biscuit, and Jones & Laughlin Steel reacted by enlarging their marketing and purchasing organizations and by perfecting their internal structures.

Third, as the integrated firms began to make fuller use of their facilities by developing by-products and new products, they came to compete with other integrated enterprises. Thus, National Lead became a major competitor of National (later American) Linseed in the production of linseed oil; and American Linseed later competed in the fertilizer markets with the large cotton oil and fertilizer firms as well as with the giant meat packers. When cotton oil and meat-packing enterprises started to produce soap from their by-products, they provided new competition for Procter & Gamble. Competition also appeared when manufacturers such as the makers of agricultural equipment and other machinery decided to develop a “full line” of products in order to make more intensive use of their marketing organization.

A final reason for continuing competition between the large integrated firms was public policy. Antitrust legislation and its interpretation by the courts in these years discouraged monopoly but not oligopoly. Yet, it must be remembered that although such legislation was significant, it was only one of several reasons why concentrated industries became and remained oligopolistic rather than monopolistic.

Source: Chandler Alfred D. Jr. (1977), The Visible Hand: The Managerial Revolution in American Business, Harvard University Press.

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