The Effects of Forward Vertical Integration on Service Performance of a Distributive Industry

THE distribution of services in the United States has undergone substantial changes in the post-war period. Of particular interest to industrial economists is the trend towards vertical integration which has disrupted traditional channels of distribution and eliminated intermediary markets whereby firms operating in different stages of production and marketing have been integrated into large comprehensive units [I2]. In some cases, vertical integration has been complete and resulted in the emergence of corporate entities which managed simultaneously the various stages. In other cases, vertical integration has been only partial, whereby through contractual arrangements, manufacturers or resellers have secured controls over firms operating at other stages of production or marketing [2]. An example of such arrangements is the franchising system through which more than one-third of products and services is currently distributed in the United States [i8]. Students of market structures are obviously concerned with the possible impact of such changes upon the performance of the distributive firms. This paper studies the effects of forward vertical integration by suppliers into distribution upon the level of services provided by the distributors.