Mergers and Market Structures. Mergers 3 Types of Mergers Economists distinguish between three types...
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Mergers and Market Structures. Mergers 3 Types of Mergers Economists distinguish between three types of mergers: 1.Horizontal 2.Vertical 3.Conglomerate
3 Types of Mergers Economists distinguish between three types
of mergers: 1.Horizontal 2.Vertical 3.Conglomerate
Slide 4
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;
Slide 5
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
Slide 6
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.
Slide 7
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.)
Slide 8
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.
Slide 9
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!
Slide 10
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!
Slide 11
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!
Slide 12
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!
Slide 13
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!
Slide 14
Market Structures
Slide 15
Barriers to entry Type of market structure influences how a
firm behaves Pricing Supply Efficiency Competition
Slide 16
High levels? Perfect competition Limited competition Monopoly
Varying degrees of competition in between What is the degree of
competition in the industry?
Slide 17
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?
Slide 18
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
Slide 19
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
Slide 20
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
Slide 21
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 Nonprice 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
Slide 22
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
Slide 23
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
Slide 24
ADVANTAGES May be appropriate if natural monopoly Encourages
R&D Encourages innovation Development of some products not
likely without some guarantee of monopoly in production Economies
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