Final answer:
Vertical integration can be profitable by reducing costs and increasing control over the supply chain; but, whether cost savings are passed to consumers depends on the market power and strategy of the integrated firm. Policymakers must balance the benefits of large-scale production with the risks of reduced competition.
Step-by-step explanation:
Vertical integration can indeed be profitable for a conglomerate when executed effectively as it allows a company to control multiple steps of the supply chain, potentially leading to cost savings. However, whether a merger, like the hypothetical case of Kinder Morgan in the natural gas marketplace, passes on these cost savings to consumers is a matter of corporate strategy and market dynamics. In some cases, if the merger leads to a strong oligopoly position, a company might have less incentive to lower prices for consumers, instead taking advantage of the reduced competition to increase profitability.
From the theoretical perspective, economic theory teaches us that competition leads to variety and lower prices for consumers, and large-scale operations can lower costs. Nonetheless, most markets are not perfectly competitive, and thus mergers and growth tend to reduce competition. Hence, policymakers are faced with the role of balancing the potential advantages of large-scale production with the risks associated with reduced market competition.