Académique Documents
Professionnel Documents
Culture Documents
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.
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.
The Williamson
contribution 1
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.
Oliver Williamson. Economies as an Antitrust Defense: The
Welfare Tradeoffs, American Economic Review, March 1968.
1
The efficiency
gain from the merger
is indicated
by the shift
from AC to
AC
Price
PM
PC
A1
A2
QM
If area A2
exceeds
Audio explanation (wav)
area A1, the
AC merger
increases
the total
AC
surplus (TS)
D
QC
Quantity
1
A1 (P )(Q)
2
Let A2 be computed by:
A2 AC QM
P
P
1/2
0.43
0.28
0.13
0.06
10
2.00
1.21
0.55
0.26
15
10.37
5.76
2.40
1.10
Back to Lesson 6