February 4, 2026
Vertical integration refers to the direct involvement of an economic agent in multiple adjacent stages of a supply chain, and it is a key firm strategy in the increasingly industrialized agri-food marketing system, with a particularly important presence in the pork and poultry industries. Reasons for vertical integration include: (a) cost-reducing synergies in production, processing and/or marketing; (b) reduced transaction costs relative to using different types of contacts or/and spot markets; (c) better quality control of the production process and output produced; (d) securing supplies for output producers and market demand for input suppliers; (e) solution to a hold-up problem; (f) optimal response to a double marginalization problem when there is market power at successive stages of the supply chain; and (g) solution to a bilateral monopoly problem arising when a single seller of a product faces a single buyer of this product. Of course, these reasons are not mutually exclusive and can hold together. For instance, firms could vertically integrate to solve a double marginalization or a bilateral monopoly problem and realize reduced production or/and transaction costs.
Despite the potential positive impacts of vertical integration, there have been legislative and regulatory efforts to abolish this vertical market arrangement in the US pork industry, as well as other industries. A key argument against vertical integration is an alleged increase in the market power of vertically integrated firms and their negative impacts on non-integrated firms, consumers, and hog producers. While there can be cases where vertical integration can reduce rivals’ access to some valuable resources, the market power argument against vertical integration seems to be based on the impacts of horizontal integration (i.e., the integration of firms at the same stage of production), which can, indeed, increase market concentration and the market power of the horizontally integrated firms. The impacts of vertical integration and, thus, of its abolishment, on the other hand, are more nuanced and more complex, as there are multiple reasons for firms to vertically integrate and, thus, multiple states of nature that can result from the abolishment of this vertical market arrangement.
The determination of the economic, market, and welfare impacts of removing vertical integration from the US pork industry is the key objective of a study we completed recently. To determine the market and welfare impacts of abolishing vertical integration, we developed an empirically relevant multi-market framework of analysis of vertical relationships in pork production that disaggregates the output and input markets of interest (markets for pork and hogs, in our case) and enables the derivation of the impacts of abolishing vertical integration on the relevant prices and quantities and the welfare of the interest groups involved (i.e., consumers, packers/pork producers, and hog producers).
As noted earlier, there are multiple reasons why firms choose to vertically integrate and, thus, multiple states of nature that can/will emerge after the abolishment of vertical integration, including vertical coordination through different forms of contracts between hog producers and packers and vertical separation of the parties involved and procurement of hogs through spot markets. Our study examines the economic impacts of the abolishment of vertical integration under all possible (and plausible) cases/reasons for vertical integration and states of nature/vertical relationships that can emerge after the removal of this form of vertical control.
Our analysis also considers the impact of abolishing vertical integration on non-integrated packers. Specifically, the study develops strategic and extensive game-theoretic models to examine how the impacts of abolishing vertical integration (determined by the analysis of the vertical market system) affect the equilibrium outcomes of the strategic interactions between integrated and non-integrated pork producers.
Analytical results are consistent across the different scenarios and forms of strategic interactions between pork producers and indicate that the abolishment of vertical integration in the US pork sector will hurt pork consumers, integrated pork producers, and the hog producers involved. The only beneficiaries of this policy/change will be the non-integrated pork producers. However, the gains of these non-integrated pork producers are lower than the consumer, hog producer, and integrated pork producer losses, resulting in net social welfare losses from this policy. The specific results of the study are presented below.
Result 1: When vertical integration results in cost-reducing synergies or/and reduced transaction costs, its abolishment will reduce the efficiency of pork production, which will, in turn, (a) increase the consumer prices of pork, (b) reduce the equilibrium quantity of pork, (c) reduce the demand for, and equilibrium quantity of hogs, (d) reduce consumer surplus, (e) reduce pork producer/packer profits, (f) reduce hog producer surplus, and (g) reduce the total economic surplus from this production activity.
Result 2: When vertical integration is associated with improved quality control, its abolishment will either reduce the quality of production or increase the costs of maintaining the same level of quality. While the outcome will influence the final consumer price (with a lower quality reducing the consumer price and the higher costs increasing the consumer price of pork), the worsened quality control in the absence of vertical integration will always (a) reduce the equilibrium quantity of pork, (b) reduce the demand for, and equilibrium price of hogs, (c) reduce consumer surplus, (d) reduce packer profits, (e) reduce hog producer surplus, and (f) reduce the total economic surplus from this production activity.
Result 3: When vertical integration is a solution to a hold-up problem, its abolishment will result either in the hold-up problem or in increased transaction costs associated with alternative solutions to this problem. While the emergence of the hold-up problem will result in underinvestment in the pork industry, the increased transaction costs associated with alternative solutions will yield the impacts described in Result 1.
Result 4: When vertical integration is employed as a solution to a double marginalization problem, its abolishment will result either in vertical separation and double marginalization or in increased transaction costs associated with vertical coordination through contracts. In either case, the abolishment of vertical integration will (a) increase the consumer prices of pork, (b) reduce the equilibrium quantity of pork, (c) reduce the equilibrium quantity of hogs, (d) reduce consumer surplus, (e) reduce pork producer profits, (f) reduce hog producer profits, and (g) reduce the total economic surplus from this production activity.
Result 5: When vertical integration is employed as a solution to a bilateral monopoly problem, its abolishment will result either in the lack of economic activity between the hog and pork producers involved or in increased transaction costs associated with vertical coordination through contracts (and the impacts of increased transaction costs described in Result 1).
Result 6: The abolishment of vertical integration will benefit non-integrated pork producers who will see their production, market share and profits increase after the policy change. The gains of non-integrated pork producers are less than the losses of their integrated counterparts, resulting in an aggregate pork producer welfare loss from the policy.
Before concluding this article, it is important to note that, while a reduction in the market share and profits of major players in a sector tends to be viewed as a socially desirable outcome linked, generally, to reduced market power of these firms, our study demonstrates that this thought process can be misleading (with adverse policy implications). Indeed, reduced market power of oligopolistic firms enhances social welfare as it results in increased quantities produced, reduced consumer prices, and increases in consumer and producer surplus that outweigh the losses of the oligopolistic firms. When firms with different market power operate in the market, then a reduction of the relative power of a subset of them translates into increased market share and profits of their rivals.
As shown in our analysis, however, the impact of abolishing vertical integration is to increase the costs of integrated firms rather than reducing their market power. And, while this increase in the costs has similar impacts on the firms involved (i.e., it reduces the market share and profits of integrated firms while increasing the market share and profits of their non-integrated rivals), the rest of the market and welfare impacts of a cost increase are the opposite of those of a market power reduction. Therefore, while a reduction in the market power of oligopolistic firms is social welfare-enhancing and, thus, socially desirable, an increase in the cost of some firms, which occurs when abolishing vertical integration, makes these firms’ rivals the only beneficiaries of this change and reduces total economic surplus and social welfare.
Cited study: Giannakas K. “Economic Impacts of Abolishing Vertical Integration in the US Pork Industry.” Working Paper 57, Department of Agricultural Economics, University of Nebraska-Lincoln. Available at: https://digitalcommons.unl.edu/ageconworkpap/57
Dr. Konstantinos Giannakas
Harold W. Eberhard Distinguished Professor
Department of Agricultural Economics
University of Nebraska-Lincoln
kgiannakas@unl.edu