Vertical Integration and Competitive Markets

So why did it make sense for Amazon to be  become a global book seller (to vertically integrate the market)and it does not make sense for a digital platform to perform laundry services for all of Manhattan?

Good question – And Al Wenger offers an interesting answer.

the answer to that question hinges on many factors. One that weighs heavily though is the competitiveness of that market. The more competitive it is, the less likely that vertical integration will increase your profitability. Here is an interesting example: book stores and Amazon. Why did it make sense for Amazon to actually become a book retailer? Because book retail is not very competitive. And the reason it isn’t is that book stores generally don’t set their own prices which are instead determined by publishers. And each publisher has a monopoly (by virtue of copyright) of the titles it publishes. So it turns out that vertically integrating let Amazon access some of those additional economics and much of the subsequent legal battles with publishers were over just that!

Now think about something like laundry. In a city like New York you don’t have to walk more than a few blocks to find a dry cleaner. The pricing for laundry and dry cleaning is quite competitive as a result. Hence access to “rents” (excess profits) to increase overall profitability is not really a valid reason for vertical integration. The same would seem to be true for many other on demand services.

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