Vertical Integration by Corporations, 1929-1965

Abstract

W HEN the surface of the economist is 14/1 7 scratched we generally find a belief that vertical integration in the corporate sector has increased during the past few decades, if not longer. This proposition, however, has not been put to a rigorous empirical test for the entire corporate sector. According to Professor Bain, We must, in the present state of knowledge, confine ourselves to a few remarks based on miscellaneous scraps of evidence. I In this note a measure of vertical integration in the corporate sector is developed. The measure is calculated for the year 1929 and for the period 1948 through 1965. The conclusion reached on the basis of this empirical evidence is that there has not been any discernible increase in the degree of vertical integration in the corporate sector. If anything, there might have been a slight decline. The index we use is the ratio of corporate sales to gross corporate product standardized to abstract from the changes in output mix. A rise in this index implies a decline in corporate vertical integration and vice versa.2 Because industry sales data are on a consolidated basis by corporation and most of the gross corporate product is on an establishment basis, this series reflects a preponderance of any general movements on the part of corporations to merge with suppliers or customers. If, for example, firm A has a gross corporate product of 500 and sales to firm B of 1000 (firm A's purchased material inputs are 500) and firm B has a gross corporate product of 500 and sales of 1500, then total corporate sales for both firms equal 2500 and total gross corporate product equals 1000. In this instance the ratio of sales to gross corporate product equals 2.5. If these two firms merge, total corporate sales will then be 1500 and gross corporate product will still be 1000. The new ratio of corporate sales to gross corporate product will be 1.5. Vertical integration has caused a decline in our ratio. As is readily aDDarent. neither pure horizontal integration nor a pure conglomerate movement will affect our ratio.3 There are natural differences among industries which preclude the meaningfulness of comparing the degree of vertical integration in one industry with that of any other industry. Thus a corporation in the service or mining industry will naturally have a much lower sales to gross corporate product ratio than a corporation in the retail or wholesale trade industry. If the proportional mix of total gross product is changing, we could very easily find a change in the aggregate sales to gross product ratio without any changes in this ratio for any specific industry. Any conclusions about changes in the ratio which are due to such changes in the proportional mix implies interindustry comparisons. In order to avoid the mix problem we calculate the aggregate ratio using the proportional mix of one base period. More explicitly our methodology is as follows: For any year t, total corporate sales, St, is equal to the sum of total corporate sales for each industry i. Thus,