4- Horizontal Mergers Flashcards
What is a Horizontal merger?
Merging firms whose products are substitutes
What is a Vertical merger?
Merging firms whose products are complements
What is a Conglomerate merger?
Merging firms whose products are unrelated
What are the 2 main ways Horizontal mergers can increase market power?
-Unilateral effects
-Coordinated effects
What are Unilateral effects?
The merged entity can exercise market power
What are Coordinated effects?
Merger leads to changes in the market environment that can foster collusion
What are 3 factors that mitigate the market power of a merger?
-High price elasticity
-Low market shares of the merging firms
-Low barriers to entry means new entrants can contest price rises
What are 3 main efficiency gains from mergers?
-Scale economies: joint production reduces average cost
-Technical/managerial efficiency
-Synergies in R&D
What is the maximisation problem of the merged firm?
Merged firm maximises joint profits
πᵢ(q)=(p-c)q₁+…+(p-c)qₘ
Differentiate wrt p or q and equate to 0
What is the maximisation problem of an outsider firm?
Maximise profit function
πₒ(q)=(p-c)qᵢ
Differentiate wrt p or q and equate to 0
How do you find the equilibrium output for an outsider firm?
Find the FOCs for the insider and outsider firm, solve the simultaneous equations for qₒ
How do you find the total equilibrium output for the merged firm?
Sub in equilibrium output for outsider firm qₒ into the FOC for the merged firm and solve for mqᵢ
How can you show whether a merger is profitable?
Show that profit of merged firm is greater than sum of profits of insider firms pre-merger
πᵐ > mπ*
How can you show outsider firms are better off post-merger?
πᵐ > π*
How do Fixed costs affect equilibrium levels?
Fixed costs do not play into firm decisions on price or quantity, they only affect profit
