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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

  1. Oil company can ensure supplies for petrol companies, this gives both companies greater control over the market
  2. Vertical mergers will not lead to technical econ of scale but will lead to other econ of scale e.g advertising, financial, organisational

Advantages of Mergers

Disadvantages of Mergers for Public

  1. Competition restricted leading to abuse of monopoly power, this is inefficient and will lead to higher prices for consumers.
  2. Diseconomies of scale
  3. Mergers are often done for managerial reasons e.g. bigger company, bigger salaries, and to protect the share price
  4. Lack of choice, if small companies are squeezed out
  5. May lead to job losses for some staff, although some will get higher pay

Disadvantages of Mergers

Competition Policy in the UK

Monopolies and mergers commission MMC looks at

  1. Mergers which create market power of greater than 25%
  2. Restrictive practices, i.e. Cartels
  3. 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.


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