A merger is when two or more companies combine to form a single entity. Think of it like two friends joining forces to build a bigger LEGO set.
Definition: Two firms that operate in the same industry and are at the same stage of production merge.
Analogy: Imagine two pizza shops in the same town deciding to combine into one bigger shop.
Example: The 1998 merger of American Airlines and US Air (both airlines).
| Advantages | Disadvantages |
|---|---|
| • Market share ↑ (more customers) • Cost savings from economies of scale • Reduced competition | • Risk of monopoly power • Possible job cuts • Regulatory scrutiny |
Exam Tip: When asked about horizontal mergers, remember to link market concentration and competitive effects. Use the term economies of scale to explain cost advantages.
Definition: A merger between firms that are at different stages of production within the same industry.
Analogy: Think of a car manufacturer merging with a tire company – one makes the car, the other supplies the tires.
Example: The 2006 merger of Disney (film studio) and ABC (TV network).
| Advantages | Disadvantages |
|---|---|
| • Supply chain control • Reduced transaction costs • Better coordination | • Potential for abuse of market power • Less competition in upstream/downstream markets • Complex integration |
Exam Tip: Highlight how vertical mergers can lead to price discrimination and discuss the concept of double marginalisation when both firms set prices independently.
Definition: A merger between firms that operate in unrelated industries.
Analogy: Picture a pizza shop merging with a music streaming service – they’re not connected in the food or music worlds.
Example: The 2005 merger of General Electric (industrial) and NBC Universal (media).
| Advantages | Disadvantages |
|---|---|
| • Diversification reduces risk • Access to new markets • Synergies in finance & marketing | • Lack of industry expertise • Management complexity • Possible dilution of brand |
Exam Tip: Discuss the diversification motive and the risk of overextension. Remember to note that conglomerate mergers rarely affect competition in a single market.
| Merger Type | Industry Relationship | Typical Motive |
|---|---|---|
| Horizontal | Same industry, same stage | Increase market share, reduce competition |
| Vertical | Same industry, different stages | Control supply chain, reduce costs |
| Conglomerate | Unrelated industries | Diversify risk, access new markets |
Exam Tip: Use the structure–concentration–performance framework to analyse any merger question. Start with the type, then discuss potential market effects, and finish with the likely outcomes for firms and consumers.