What is Vertical Integration?

A business strategy that seeks to own and control all the activities including production, transportation, and marketing of a product. There are three types of vertical integration: backward vertical integration - a strategy when a company establishes subsidiaries to suply product inputs; forward vertical integration - a strategy that tries to take control of distribution and marketing of a product; and balanced vertical integration - a firm owns the subsidiaries that produce inputs and also distributes outputs. Vertical integration is one of the ways to solve a hold-up problem.