Horizontal Integration:

Horizontal integration is the merger of two firms at the same stage of production, producing the same product. For example, the merger of two car producers or two TV companies. There are two key motives behind horizontal integration. One is to take greater advantage of economies of scale. The new firm will be larger and hence may be able to produce at lower average cost.The other is to increase the market share. By merging with another firm producing the same product, a direct competitor is eliminated. Another possible benefit that may arise from horizontal integration is rationalization. If the two firms had not been using all their resources fully, merging could enable them to sell off the redundant resources, for instance, one office block. The new firm may also be able to save on managerial staff.

There is a risk, however, with horizontal integration that the merged firm may experience diseconomies of scale. Also, a large firm can be difficult to control. It may also be difficult to integrate the two firms if they initially had different management structures or are located some distance apart.