Competitive advantage over rival producers

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A manufacturer of pencils contemplates backward integration into the production of rapeseed oil, a key ingredient in manufacturing the rubberlike material (called factice) that forms the eraser. Rapeseed oil is traded in world commodity markets, and its price fluctuates as supply and demand conditions change. The argument that has been made in favor of vertical integration is this: "Pencil production is very utilization-sensitive (i.e., a plant that operates at full capacity can produce pencils at much lower cost per unit than a plant that operates at less than full capacity). Owning our own source of supply of rapeseed oil insulates us from short-run supply-demand imbalances and therefore will give us a competitive advantage over rival producers." Explain why this argument is wrong.

Reference no: EM131186167

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