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Mergers

 A merger  is a

transaction that results

in the transfer ofownership and  control

of a corporation. 

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3 Types of MergersEconomists distinguish between three

types of mergers:

1. Horizontal

2. Vertical

3. onglomerate

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Horizontal mergers

  A horizontal merger results in theconsolidation of rms that are direct rivals—thatis, sell substitutable products within overlapping

geographic marets!

E!amples: "oeing#Mc$onnell $ouglas% &taples#'ffice

$epot(unconsummated)% hase Manhattan#hemical "an*%

&outhern +acific ,,#&ante -e ,,% +abst#"latz% /V#

,epublic &teel% 0onishiro*u +hoto#Minolta.

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"ertical Mergers

  The merger of rms that haveactual or potential buyer#seller

relationships

E!amples: /ime arner#/"&% $isney#" apitol

ities% leeland liffs 4ron#$etroit &teel% "rown &hoe#

0inney5 -ord#"endi!.

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$onglomerate mergers

  $onsolidated rms may sell relatedproducts, share mareting and distributionchannels and perhaps production processes%or they may be wholly unrelated!

6Product extension conglomerate mergers inole firms that

sell non#competing products use related mar*eting channels

of production processes.

E!amples: ardinal Healthcare#llegiance% '#/ime

arner% +hillip Morris#0raft% iticorp#/raelers 4nsurance%

+epsico#+izza Hut% +roctor 7 8amble#loro!.

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6Market extension conglomerate mergers 9oin together firmsthat sell competing products in separate geographic mar*ets.

E!amples: &cripps Howard +ublishing0no!ille ;ews

&entinel% /ime arner#/4% Morrison &upermar*ets#

&afeway%&" ommunications#+acific /elesis

6 pure conglomerate merger unites firms that hae no

obious relationship of any *ind.

E!amples:"an*orp of merica#Hughes Electronics %,.<.,eynolds#"urmah 'il 7 8as% /7/#Hartford 4nsurance

 

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Anticompetitive &'ects of Mergers

4ssue: hen and how are mergers welfare#reducing (that is5 result

in a post#merger decrease in /& = 6Horizontal mergers eliminate sellers and hence reshape market

structure. ,ecall that the structuralists beliee that

mar*et structure is the primary determinant of mar*et performance.

6Mergers may result in market foreclosure. -or e!ample5 the<ustice $epartment feared that Microsoft>s proposed ac?uisition of

4ntuit would result in a foreclosure of the mar*et for personal

finance software.

6 Mergers may diminish potential competition. -or e!ample5 the

ac?uisition of loro! by +roctor 7 8amble eliminated +78 as a

 prime potential entrant  in the mar*et for household bleach.

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Horizontal mergers hae a direct

impact on seller concentration (as

measured by the concentrationratio or the Herfindahl inde!).

Hence the potential to diminished

competition is clear to see.

,emember the formula from the

ournot Model:

n p

 MC  P 

η 

1=

−

here n is the number of sellers. merge reduces n5

hence increases the price#cost margin and reduces /&5

other things being e?ual.

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 The (illiamson

contribution )

)*liver (illiamson! +&conomies as an Antitrust efense- The(elfare Tradeo's,. American &conomic /eview, March )012!

  It would seem at first blush that horizontal mergers

would invariably  be welfare-reducing. However, if the

consolidation of direct rivals leads to greater costefficiency, then a horizontal merger could (in theory at

least) be welfare-enhancing.

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elfare trade#offs of a horizontal merger 

'lier illiamson contends that

a horizontal merger can be

welfare#enhancing5 even if 

the post-merger market  structure is monopolistic. hy= "ecause

the merger may result in greater 

technical@cost efficiency.

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A

Price

QuantityB

A1

A2

 D

AM

+M

+

C

/he efficiency

gain from the merger 

is indicated

 by the shiftfrom to

C f area A4 

e5ceeds

area A), themergerincreasesthe total

surplus 6T78

udio e!planation (wa)

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Measuring the (elfare Tradeo's

et 1 be computed by

))((2

11   Q P  A   ∆∆=

et 2 be computed by:

 M Q AC  A   ×∆=2

4f 1 D 25

the merger is

welfare#neutral

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3 4 ) )94

: ;!<3 ;!42 ;!)3 ;!;1

); 4!;; )!4) ;!:: ;!41

): );!3= :!=1 4!<; )!);

η 

 P 

 P ∆

+ercentage ost ,eduction &ufficient to 'ffset

+ercentage +rice 4ncreases for &elected Values of η.

Hear audio e!planation (wa)

&ource: Viscusi5 Vernon5 and Harrington5 /able .15 p.

2BB

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Vertical and conglomerate mergers do

not affect mar*et structure (e.g.5

seller concentration) directly. s youwill discoer subse?uently5 these

types of mergers mergers can

neertheless hae anticompetitie

conse?uences.

"ac* to esson F