When two or more units, performing different sequential activities in the same industry are combined, the combination is called Vertical Combination. In this kind of combination, the work of combined units is not competitive but is complementary to each other, that is, the finished product of one unit is the raw material for the other unit. For example, a combination of a unit engaged in producing cotton thread, with a unit producing cloth, is a form of Vertical Combination.
- To eliminate intermediaries.
- To bring co-ordination in the activities of the same industry.
- To end the uncertainty of the usage of the finished product.
- To bring economy in the expenses of advertisement, transportation etc.
Merits of Vertical Combination
Availability of Raw Material
In this kind of combination, the units have no worries of purchasing raw materials, because the finished product of one unit is the raw material for the other unit.
Economy in Expenses
Such combination brings economy in the expenses incurred on raw material, transport etc. of finished product.
No Need of Storing Goods
In this kind of combination, storing of raw material or semi finished goods etc. is not required. Therefore, there is saving in the cost of storing.
No Problem of Selling
There arises no difficulty in the sale of finished product because it is purchased by the next unit.
Elimination of Middlemen
Such combination eliminates middlemen which help in decreasing the prices of products.
Demerits of Vertical Combination
Under such kind of combination, if
E any problem arises in one unit, of the combined units, it poses a danger of upsetting the organisation of other units.
Lack of Monopoly
There can be several kinds of combinations in the same industry. Therefore in Vertical Combination the profits earned through monopoly cannot be achieved.
Such combination is possible only in those units, one of whose finished product can be used as a raw material for the other.
Since there can be many units combined in a single industry therefore, competition between units carrying on the same business prevails.