Excerpts and adapted from Manuel Becerra Theory of the Firm for Strategic Management.

The Transaction Cost Economics view of the firm TCE, (built by Oliver Williamson and based on Coase´s work on transaction costs)  tells us that firms would internalize those exchanges to operate more efficiently as long as the cost of doing these exchanges inside the firm is smaller than transacting through the market.

Furthermore, vertical integration may result in operational efficiencies, both administrative and technological. To be efficient, firms are likely to internalize those transations that are more frequent, highly specific, complex, and surrounded with greater uncertainty. 

Coase R.H., “The Nature of the Firm“, 1937, Economica, 386-405

The Resource Based View of the firm stresses the knowledge implications of vertical integration. The RBV sees the firm as a collections of resources. Penrose has inspired the foundations of this theory.  Penrose 1959, “The Theory of the Growth of the Firm“.

Porter highlighted several advantages of vertical integration, including how it could assure supply and /or demand for the firm, offset bargaining power and input cost distortions, elevate entry and mobility barriers, enhance the ability to differentiate, and defend against foreclousre. Porter 1980, Competitive Strategy.

Finally, the implications of vertical integration on customer relationships also need to be considered. For example, for firms integrating forwards it means having direct access to customers, and provide after sales service.