Vertical integration has become an important business strategy among food manufacturers because it allows them to manage and customize their production according to consumer needs. Economic theory has shown that vertical integration may be induced by transaction costs, demand variability, market power motives, and other factors. This paper presents an index of forward vertical integration for U.S. food manufacturing industries and uses an econometric analysis to examine the factors that motivate vertical integration in these industries. Empirical results indicate the role of both transaction cost factors and potential monopoly motives. [JEL Classification: L13, Q13.] © 2005 Wiley Periodicals, Inc. Agribusiness 21: 429–445, 2005.