The term vertical integration means coordinating the various stages of an industry chain when bilateral trading is just not beneficial. Vertically integrated businesses in a supply chain are united by way of a common owner. Generally each member of the supply chain generates a different product or service. Vertical integration is a dangerous, complicated, expensive, and difficult to reverse strategy. Vertical integration is an approach to prevent the hold-up problem.
Backward Integration
Backward integration refers to a situation when a company controls subsidiaries which produce a few of the inputs used in the production of its goods. In other words, backward (upstream) vertical integration is a situation where a consumer of raw materials acquires its suppliers, or establishes its own facilities to guarantee a more reliable or cost-effective supply of inputs. Backward integration means the company is integrating in the direction away from the customer. For instance, a company producing cars may own a tire company, a glass company, and a metal company. Another example is of a coffee retailer which merges with coffee growers thus controlling supply of coffee beans.