Megers - Economic Notes
Horizontal: This occurs when 2 firms at the same stage of production merge, e.g. 2 petrol stations
Vertical Mergers: This occurs when 2 firms at different stages of production merge e.g. a petrol station and an oil company
Advantages of mergers
1. Econ of scale - technical econ ( sharing Fixed costs - Investment economies - Financial economies - Advertising economies - Risk bearing econ of scale 2. greater R&D can lead to development of new products e.g. Oil companies looking for new oil
Advantages of vertical Mergers
- Oil company can ensure supplies for petrol companies, this gives both companies greater control over the market
- Vertical mergers will not lead to technical econ of scale but will lead to other econ of scale e.g advertising, financial, organisational
Disadvantages of Mergers for Public
- Competition restricted leading to abuse of monopoly power, this is inefficient and will lead to higher prices for consumers.
- Diseconomies of scale
- Mergers are often done for managerial reasons e.g. bigger company, bigger salaries, and to protect the share price
- Lack of choice, if small companies are squeezed out
- May lead to job losses for some staff, although some will get higher pay
Competition Policy in the UK
Monopolies and mergers commission MMC looks at
- Mergers which create market power of greater than 25%
- Restrictive practices, i.e. Cartels
- predatory pricing, selling at a loss to forces competitors out
The OFT recently looked into the major supermarkets to see whether they were exploiting the customer. They gave the Supermarkets a clean bill of health, apart from selling a few items at below cost price.
