A motive for vertical integration is forward vertical integration. How does Vertical integration avoid double marginalization?

• Single integrated firm is facing a market demand curve, D, an achieves maximum profit by putting MC = MR where MC are the actual production costs • The vertically integrated company has marginal costs MC1 and has a marginal revenue curve corresponding to MR2, so sets MC1 = MR2 • The merged company chooses to sell the amount Q2 price P2 • Which (by definition) provides the highest profit, which are thus higher profit than the total profit that existed prior to vertical integration • Note that the total consumer surplus is also greater for the vertical integration. Overall increases 'total welfare'. (This emphasis is also placed on merger control) (See pic) By integrating with supplier A, producer of X can get input A at MC as well and does not have to pay the mark-up! This means can use input substitution to go from point D to E: buy more of A cheaper and therefore reduce input B. The result is that X producer can achieve the same output of X at a lower cost! C3 < C1 is the costs savings by vertically integrating, which – everything else equal - raises X‘s profits!