Chapter 11

Question 1

Horizontal mergers & vertical mergers

Answer 1

Horizontal: mergers or acquisitions between two firms in the same industry

Vertical: mergers between firms at different stages of the value chain

Question 2

Economic effects of horizontal mergers

Answer 2

Cost efficiencies: Savings in fixed costs typically result from eliminating duplicated functions in the new merged firm. Variable cost savings can result from different factors.

Merger synergies: Combining the best of each firm’s competitive advantages

Mergers normally imply an increase in prices and a reduction in costs

Question 3

The profit effect of mergers (and effect non-merging firms)

Answer 3

4 different effects to consider:
Fixed cost savings
The more efficient a firm the greater its profit
Decrease in number of competitors
Negative effect, by merging 2 profits are turned into one

The value of the non-merging firms may decrease or increase as a result of a merger, depending on the cost efficiencies generated by the merger.

Question 4

Pre-emptive mergers

Answer 4

The primary goal of an acquisition may be to pre-empt a rival from doing so. It is even possible that a firm engages in a merger that decreases value

Question 5

Merger waves

Answer 5

Periods of intense merger activity in a given industry alternate with periods of relative stability.

Merger waves my result from exogenous events ( industry deregulation) or from endogenous events ( 2 large firms merge)

Question 6

Mergers and entry

Answer 6

If barriers to entry are not very high, then mergers tend to be followed by new firm entry

Question 7

Horizontal merger policy

Answer 7

Consumers: lose
Non-merging firms: may lose or gain
Merging firms: expected to gain

The greater the price increase the less desirable the merger is considered to be

1. unilateral effect: function of increase in concentration. Likely to be great without asset transfer.
2. Collusion effect: likely to be great with asset transfer

Question 8

Firm size in merger policy

Answer 8

1. The smaller the merging firms are, the lower the price increase caused. –> more likely the total effect of a merger is positive.
2. Merger between small firms indicates that efficiency gains are likely to be significant

Question 9

Dynamics aspects of merger policy

Answer 9

Approving a merger today may have an impact on future mergers as well. In other words, if industry entry is relatively easy, then post-merger entry partly corrects for the market power effect of a merger.

Question 10

Merger remedies and types

Answer 10

Merger remedies are used by competition authorities to maintain or restore competition in the market, by resolving and preventing the harm to the competitive process that may result as a consequence of a merger.

Structural and behavioural remedies