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Merger 103
Merger 103
Merger 103
A merger is a transaction that results in the transfer of ownership and control of a corporation.
3 Types of Mergers
Economists distinguish between three types of mergers:
1. Horizontal 2. Vertical 3. Conglomerate
Horizontal mergers
A horizontal merger results in the consolidation of firms that are direct rivalsthat is, 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; Pabst-Blatz; LTVRepublic Steel; Konishiroku Photo-Minolta.
Vertical Mergers
The merger of firms that have actual or potential buyer-seller relationships Examples: Time Warner-TBS; Disney-ABC Capitol Cities; Cleveland Cliffs Iron-Detroit Steel; Brown ShoeKinney, Ford-Bendix.
Conglomerate mergers
Consolidated firms may sell related products, share marketing and distribution channels and perhaps production processes; or they may be wholly unrelated. Product extension conglomerate mergers involve firms that sell non-competing products use related marketing channels of production processes. Examples: Cardinal Healthcare-Allegiance; AOL-Time Warner; Phillip Morris-Kraft; Citicorp-Travelers Insurance; Pepsico-Pizza Hut; Proctor & Gamble-Clorox.
Market extension conglomerate mergers join together firms that sell competing products in separate geographic markets. Examples: Scripps Howard PublishingKnoxville News Sentinel; Time Warner-TCI; Morrison SupermarketsSafeway;SBC Communications-Pacific Telesis
A pure conglomerate merger unites firms that have no obvious relationship of any kind.
Examples:BankCorp of America-Hughes Electronics ;R.J. Reynolds-Burmah Oil & Gas; AT&T-Hartford Insurance
Horizontal mergers have a direct impact on seller concentration (as measured by the concentration ratio or the Herfindahl index). Hence the potential to diminished competition is clear to see. Remember the formula from the Cournot Model: P MC 1 p n
Where n is the number of sellers. A merge reduces n, hence increases the price-cost margin and reduces TS, other things being equal.
It would seem at first blush that horizontal mergers would invariably be welfare-reducing. However, if the consolidation of direct rivals leads to greater cost efficiency, then a horizontal merger could (in theory at least) be welfare-enhancing.
1Oliver
Williamson. Economies as an Antitrust Defense: The Welfare Tradeoffs, American Economic Review, March 1968.
Price
The efficiency gain from the merger is indicated by the shift from AC to AC
PM
PC
A1 A2
If area A2 exceeds Audio explanation (wav) area A1, the merger AC increases the total AC surplus (TS) D QC Quantity
QM
1 A1 (P)(Q) 2
Let A2 be computed by:
A2 AC QM
Percentage Cost Reduction Sufficient to Offset Percentage Price Increases for Selected Values of . Hear audio explanation (wav)
P P
5 10 15
Vertical and conglomerate mergers do not affect market structure (e.g., seller concentration) directly. As you will discover subsequently, these types of mergers mergers can nevertheless have anticompetitive consequences.
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