A company that produces toys is considering backward integration into production of a certain type of oil, an important component in making the rubber-like material required for the toys. This oil is traded in world commodity markets and its price fluctuates as supply and demand conditions change. The argument has been made in favor of vertical integration: “Toys production is very utilization sensitive, i.e., a plant that operates at full capacity can produce toys at a 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.” Do you agree with this argument? Why?
Please be detailed as possible.