Mergers and Market Structures
Mergers
3 Types of Mergers
Economists distinguish between three
types of mergers:
1. Horizontal
2. Vertical
3. Conglomerate
Horizontal mergers
• The consolidation of firms that are direct rivals
• They sell substitutable products within overlapping
geographic markets
Examples:
• Boeing-McDonnell Douglas
• Staples-Office Depot(unconsummated)
• Chase Manhattan-Chemical Bank
• Southern Pacific RR-Sante Fe RR;
Vertical Mergers
• merger of firms that have actual or
potential buyer-seller relationships
Examples:
• Time Warner-TBS
• Disney-ABC Capitol Cities
• Cleveland Cliffs Iron-Detroit Steel
Conglomerate mergers
• Consolidated firms may sell related products, share
marketing and distribution channels and production
processes
• they may be wholly unrelated.
•“Product extension”: involve firms that sell non-competing products
use related marketing channels of production processes.
Examples:
• AOL-Time Warner
• Pepsico-Pizza Hut
• Proctor & Gamble-Clorox.
Conglomerate mergers (cont.)
•“Market
extension”: join together firms that sell
competing products in separate geographic
markets.
•Examples:
•Time Warner-TCI;
•Morrison Supermarkets-Safeway
•“pure conglomerate”: unites firms that have no
obvious relationship of any kind.
• Examples:
• BankCorp of America-Hughes Electronics
• R.J. Reynolds-Burmah Oil & Gas
Anticompetitive Effects of Mergers
•Horizontal mergers eliminate sellers and hence
reshape market structure.
•Mergers may result in market foreclosure.
•For example, the Justice Department feared that
Microsoft's proposed acquisition of Intuit would
result in a foreclosure of the market for personal
finance software.
• Mergers may diminish potential competition.
•For example, the acquisition of Clorox by Proctor
& Gamble eliminated P&G as a prime potential
entrant in the market for household bleach.
What type of merger?
A leading manufacturer of athletic shoes,
merges with a soft drink firm. The resulting
company is faced with the same
competition in each of its two markets after
the merger as the individual firms were
before the merger. One example of this
merger was the merger between the Walt
Disney Company and the American
Broadcasting Company.
CONGLOMERATE!
What type of merger?
A merger between Coca-Cola and the
Pepsi beverage division, for example, would
be this. The goal is to create a new, larger
organization with more market share.
Because the merging companies' business
operations may be very similar, there may
be opportunities to join certain operations,
such as manufacturing, and reduce costs..
HORIZONTAL!
What type of merger?
The acquisition of Mobilink Telecom Inc. by
Broadcom is a proper example of this. Broadcom
deals in the manufacturing Bluetooth personal area
network hardware systems and chips for IEEE 802.11b
wireless LAN. Mobilink Telecom Inc. deals in the
manufacturing of product designs meant for
handsets that are equipped with the Global System
for Mobile Communications technology. It is also in
the process of being certified to produce wireless
networking chips that have high speed and General
Packet Radio Service technology. It is expected that
the products of Mobilink Telecom Inc. would be
complementing the wireless products of Broadcom.
CONGLOMERATE!
What type of merger?
An automobile company joining with a parts
supplier would be an example of this. Such a
deal would allow the automobile division to
obtain better pricing on parts and have
better control over the manufacturing
process. The parts division, in turn, would be
guaranteed a steady stream of business.
VERTICAL!
MAKE YOUR OWN MERGER!
•
Draw or describe an example of a horizontal and
vertical merger.
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Your descriptions should be written in a similar format to the
ones we described on the previous slides!
Your drawings should include a symbol that is reflective of
the companies.
Extra Credit: Research a conglomerate merger and
draw a visual for this! (takes place of one missing
homework assignment)
•
You may use your computer
Market Structures
Type of market structure influences how a firm behaves
Pricing
Supply
Barriers to entry
Efficiency
Competition
What is the degree of competition in the industry?
• High
levels?
• Perfect competition
• Limited competition
• Monopoly
• Varying degrees of
competition in between
What are the determinants of a market structure?
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Freedom of entry and exit
Nature of the product
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Homogenous?
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Differentiated?
Control over supply and output of supply
Control over the price
Barriers to entry
Perfect Competition
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Has the following:
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Free entry and exit to industry
Homogenous product – identical so no consumer
preference
Large number of buyers and sellers – no individual
seller can influence price
Sellers are price takers – have to accept the
market price
Perfect information available to buyers and sellers
Examples of Perfect Competition:
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Financial markets – stock exchange, currency markets,
bond markets?
Agriculture?
Advantages
ADVANTAGES
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High degree of competition
helps allocate resources to
most efficient use
Price = marginal costs
Normal profit made in the
long run
Firms operate at maximum
efficiency
Consumers benefit
Imperfect of Monopolistic Competition
Many buyers and sellers
• Products differentiated
• Relatively free entry and exit
• Each firm may have a tiny ‘monopoly’
because of the differentiation of their product
• Firm has some control over price
• Examples – restaurants, professions – solicitors,
etc., building firms – plasterers, plumbers, etc.
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Oligopoly- Competition amongst the few
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Industry dominated by small number of large firms
Many firms may make up the industry
High barriers to entry
Products could be highly differentiated – branding or
homogenous
Non–price competition
Price stability within the market - kinked demand curve?
Potential for collusion?
Abnormal profits
High degree of interdependence between firms
Examples:
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Supermarkets
Banking industry
Chemicals
Oil
Medicinal drugs
Broadcasting
Duopoly
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Industry dominated by two large firms
Possibility of price leader emerging – rival will follow
price leaders pricing decisions
High barriers to entry
Abnormal profits likely
Monopoly
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High barriers to entry
Firm controls price OR output/supply
Abnormal profits in long run
Possibility of price discrimination
Consumer choice limited
Prices in excess of MC
Advantages and Disadvantages of Monopoly
ADVANTAGES
May be appropriate if
natural monopoly
Encourages R&D
Encourages innovation
Development of some
products not likely
without some
guarantee of
monopoly in
production
Economies of scale
can be gained –
consumer may benefit
DISADVANTAGES
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Exploitation of consumer –
higher prices
Potential for supply to be
limited - less choice
Potential for inefficiency –
• X-inefficiency –
complacency over
controls on costs