Firms A, B, and C are engaged in production of the same consumers' good in a free market—that is, a market not subject to the VAT or other interventions. As can be seen in the diagram, Firms A and B carry out separate stages of production, while Firm C produces the good by the same process but vertically integrates the two stages. Each unit of the consumers' good has a market value of $297 and requires for its production quantities of factors x, y, and w with marginal costs as shown. The market interest rate is 10%, and for simplicity the risk to capitalists is assumed to be negligible. Consequently the average return should approach 10% per annum, and careful examination reveals that each firm does indeed earn such a return. For example, Firm A realizes a net profit of $20 on an investment of $200, over a one-year period of production.

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