Economics 101: Vertical Integration and Common Misconceptions
Day 759, 17:20
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Published in USA 
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by
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by batterytime
ECONOMICS 101
Vertical Integration: Mistakes, Misconceptions, and Benefits
While vertical integration works in real life, it doesn't really work in eRepublik.
What does this mean in simple terms? It means that if you DO NOT get more profits by owning companies that work together, like a iron company and an weapons company. I see so many cases where people tell me "Hey batterytime! Should I open a food company, I already have a grain company so I'll be able to sell grain to myself and get more profits!" and I cringe.
Why is this so?
This occurs because vertical integration (ie, self-supply) is good in real life because it cuts down on transportation, transaction, and other overhead costs. For example, if you're a car company like GM, you could make your steel and cars in the same factory and not have to pay for shipping the steel.
HOWEVER, in eRepublik, those costs are non-existent. There's no fee for buying your RM from across the Atlantic Ocean in Greece, even though the two places are thousands of miles apart, nor is there any extra fee for buying from somebody else over buying from yourself.
In other words, if you have a iron company and a weapons company, selling yourself the iron won't make you any more money than selling the iron out on the regular market. At first, you might think "Woo, my weapons company is making a LOT more money now that I don't have to pay for iron!"
WRONG.
That is a common economic blunder that a lot of people make. You still ARE paying for the iron, in the form of the lost revenue you would have had if you sold the iron on the regular market. Say you were selling iron for 0.4 USD a unit, and then bought all of it yourself: you're still paying for the iron right?
This is what economists call OPPORTUNITY COST, or the cost of the opportunity you gave up to do a certain thing. In this case, your opportunity cost is the revenue of the iron you gave up to give it to your weapons company for free. Sure, your weapons company is making a lot more profit, but your iron company is now making a lot less. If you add them together, it all cancels out and you're making the same amount of money either way.
That isn't to say that buying a weapons company and a iron company is a BAD thing to do. Rather, this only means that you won't get EXTRA profits by having both versus owning them separately. If weapons and iron are both profitable, you can still get both and be happy, since that extra company is making more money. It's just that you won't make more money by selling to yourself than selling out on the market.
That being said, there is still one major benefit to buying two companies that can be linked together (wood/const, diamonds/gifts, iron/weapons, grain/food). If you do so, you'll have a guarenteed outlet for your goods, namely your construction/manufacturing company. If you find the market for iron is hard to sell in, you could always just sell to yourself, and not have to go through the hassle of selling on the open market.
Thank you for reading Economics 101! More issues will become available periodically. Please PM me if you have any idea for an article.
~Batterytime
Vertical Integration: Mistakes, Misconceptions, and Benefits
While vertical integration works in real life, it doesn't really work in eRepublik.
What does this mean in simple terms? It means that if you DO NOT get more profits by owning companies that work together, like a iron company and an weapons company. I see so many cases where people tell me "Hey batterytime! Should I open a food company, I already have a grain company so I'll be able to sell grain to myself and get more profits!" and I cringe.
Why is this so?
This occurs because vertical integration (ie, self-supply) is good in real life because it cuts down on transportation, transaction, and other overhead costs. For example, if you're a car company like GM, you could make your steel and cars in the same factory and not have to pay for shipping the steel.
HOWEVER, in eRepublik, those costs are non-existent. There's no fee for buying your RM from across the Atlantic Ocean in Greece, even though the two places are thousands of miles apart, nor is there any extra fee for buying from somebody else over buying from yourself.
In other words, if you have a iron company and a weapons company, selling yourself the iron won't make you any more money than selling the iron out on the regular market. At first, you might think "Woo, my weapons company is making a LOT more money now that I don't have to pay for iron!"
WRONG.
That is a common economic blunder that a lot of people make. You still ARE paying for the iron, in the form of the lost revenue you would have had if you sold the iron on the regular market. Say you were selling iron for 0.4 USD a unit, and then bought all of it yourself: you're still paying for the iron right?
This is what economists call OPPORTUNITY COST, or the cost of the opportunity you gave up to do a certain thing. In this case, your opportunity cost is the revenue of the iron you gave up to give it to your weapons company for free. Sure, your weapons company is making a lot more profit, but your iron company is now making a lot less. If you add them together, it all cancels out and you're making the same amount of money either way.
That isn't to say that buying a weapons company and a iron company is a BAD thing to do. Rather, this only means that you won't get EXTRA profits by having both versus owning them separately. If weapons and iron are both profitable, you can still get both and be happy, since that extra company is making more money. It's just that you won't make more money by selling to yourself than selling out on the market.
That being said, there is still one major benefit to buying two companies that can be linked together (wood/const, diamonds/gifts, iron/weapons, grain/food). If you do so, you'll have a guarenteed outlet for your goods, namely your construction/manufacturing company. If you find the market for iron is hard to sell in, you could always just sell to yourself, and not have to go through the hassle of selling on the open market.
Thank you for reading Economics 101! More issues will become available periodically. Please PM me if you have any idea for an article.
~Batterytime
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1st APPROVED
Excellent
excellent article!
Very good article. I think you should nominate this for the Flufferton Foundation's economy article reward.
omglogic!
great work, BT. thanks for sharing
What about taxes? Can't you save on taxes from RM -> FG company?
True... but you can use your manufacturing company to buyout the needed raws that competitors are selling low, to give your RM company a higher market price.
Yeah Dell Fargus, but the situation now a days is that the market is so large, you couldn't raise the price by any more than a penny, and that would take a lot of effort. At daily production of 200-300 pieces of whatever quality RM you're making, that translates to maybe 2-3 extra USD.