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Horizontal Mergers and Firm Advantages
Explain the advantages to a firm of a horizontal merger.
Firm Behavior and Strategies
Frequently asked question
Keep an eye on time and allocate sufficient minutes for each section of the essay.
A horizontal merger occurs when two firms that operate in the same industry or market combine to form a single entity. Here are some advantages of a horizontal merger for a firm:
Firstly, a horizontal merger can help a firm gain market power or share, allowing it to become larger and more dominant in the market. This can be achieved by eliminating a competitor or by controlling a greater portion of the market. This can allow the firm to increase prices, as there are fewer competitors to challenge its pricing strategy. In turn, this can result in increased profitability for the firm.
Secondly, a horizontal merger can help a firm reduce its average costs of production by taking greater advantage of economies of scale. Economies of scale refer to the cost advantages that firms can achieve by producing larger quantities of goods or services. With a horizontal merger, the combined firm can benefit from the increased scale of production, resulting in lower average costs. This can make the firm more competitive internationally and may lead to lower prices or higher profits, depending on the firm's pricing strategy.
Lastly, a horizontal merger can help a firm keep up with its competitors and avoid being driven out of the market. In an increasingly competitive market, a firm may need to combine with another firm to remain competitive and maintain its market position. By doing so, the firm can access new markets, technologies, and products that it may not have had access to before the merger.
In conclusion, a horizontal merger can provide a firm with several advantages, including gaining market power, reducing average costs of production, and keeping up with competitors. However, it is essential to recognize that horizontal mergers can also have potential drawbacks, including increased market power leading to antitrust concerns, integration challenges, and cultural differences between the two firms. Therefore, it is essential for firms to carefully consider the potential benefits and risks of a horizontal merger before pursuing such a strategy.
- Explanation of the importance of understanding the reasons behind a company's actions
II. Reasons for gaining market power
- Eliminating a competitor
- Controlling more of the market
- Increasing prices as fewer competitors
- Examples of companies that have gained market power
III. Reasons for reducing average costs of production
- Taking greater advantage of economies of scale
- Example of economy of scale
- Decreasing prices/profits to remain competitive internationally
IV. Reasons for keeping up with competitors
- Avoiding being driven out of the market
- Examples of companies that have failed to keep up with competitors
- Recap of the importance of understanding a company's motivations
- Implications for consumers and the market as a whole
Logical explanation which might include: To gain market power or share / monopoly power / become larger - by eliminating a competitor / controlling more of the market - can increase prices as fewer competitors -. To reduce average costs of production - by being able to take greater advantage of economies of scale - example of economy of scale - more competitive internationally - may decrease prices / profits -. To keep up with competitors - to avoid being driven out of the market -.