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.

•“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

Conglomerate mergers (cont.)

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!

• Draw or describe an example of a horizontal and vertical merger.

• 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

MAKE YOUR OWN MERGER!

Market Structures

Barriers to entry

Type of market structure influences how a firm behaves

PricingSupply

EfficiencyCompetition

•High levels?• Perfect competition

•Limited competition• Monopoly

•Varying degrees of competition in between

What is the degree of competition in the industry?

• Freedom of entry and exit• Nature of the product

• Homogenous?• Differentiated?

• Control over supply and output of supply• Control over the price• Barriers to entry

What are the determinants of a market structure?

• Has the following: • 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:• Financial markets – stock exchange, currency markets, bond

markets?• Agriculture?

Perfect Competition

ADVANTAGES• 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

Advantages

• 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.

Imperfect of Monopolistic Competition

• 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:

• Supermarkets• Banking industry• Chemicals• Oil• Medicinal drugs• Broadcasting

Oligopoly- Competition amongst the few

• 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

Duopoly

• 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

Monopoly

ADVANTAGESMay be appropriate if natural monopolyEncourages R&DEncourages innovationDevelopment of some products not likely without some guarantee of monopoly in productionEconomies of scale can be gained – consumer may benefit

• Exploitation of consumer – higher prices

• Potential for supply to be limited - less choice

• Potential for inefficiency – • X-inefficiency –

complacency over controls on costs

DISADVANTAGES

Advantages and Disadvantages of Monopoly