Capacity ExpansionIf a dominant firm manufactures consumer goods, it may integrate forward into wholesale and retail distribution. By integrating forward, the dominant firm can guarantee itself secure access to the final consumer and control efforts to differentiate its product.

Backward integration into the production into the production of the input ensures supplies and reduces the cost of coordinating activities at different stages of production undoubtedly a factor in the vertical integration of steel firms and iron mines. But a decision to integrate, even it made for reasons of efficiency, will have implications for the entry decision of rivals. A decision by a dominant firm to integrate vertically can place an entrant at a cost disadvantage and increase its sunk entry costs. U.S. steel’s control of iron supplies, for example, is thought to have played a pivotal role in maintaining its position during its long dominance of the steel industry.

Consider the plight of a firm considering entry into a manufacturing industry dominated by a vertically integrated firm. If the entrant comes in at the manufacturing level only, it will have to distribute its product through independent wholesalers and retailers. It will have to pay for their support, either directly or by offering the product to the distributor at a lower price recall the Vebco case study.