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Microeconomics

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What are the differences among horizontal, vertical, and conglomerate mergers? Is one type preferable from the view of anti-trust policy?

A horizontal merger occurs when firms selling substitutable goods within the same geographical market or overlapping geographical markets joins together to form one company. An example of this would be a merger between Staples and Office Depot.

In a vertical merger, firms maintaining or firms that could have maintained a buyer-seller relationship joins together to form one company. An example of this would be a merger between Kentucky Fried Chicken and Perdue Farms, where Kentucky Fried Chicken is the buyer of chicken meat and Perdue Farms the seller of chicken meat.

In a conglomerate merger, the firms joining together to become one company may be involved in the same marketing and distribution channel, or may sell similar products or may even be unrelated. The merger of AOL and Time Warner may be viewed as a conglomerate merger, with the companies selling non-competing products but using similar distribution and marketing channels.

Is one type preferable from the view of anti-trust policy?
From the perspective of anti-trust policy, the horizontal merger is the one with the greater ability to have a direct impact on seller concentration that leads to diminished competition. Anti-trust policy will therefore be less supporting of horizontal mergers.

While all mergers may have a negative effect on competition, both vertical and conglomerate are usually less a threat than horizontal. Of the two, anti-trust policy usually prefers vertical mergers. The threat to competition is much less when firms at different levels in the market enter into contracts or decide to merge. The court is usually more lenient with vertical business relationships.

I said "anti-trust policy usually prefers vertical mergers". Would it instead be conglomerate?

Solution Preview

An anti-trust law is a law that regulates and prohibits certain kinds of market behaviour, such as monopoly and monopolistic practices. Regulation by government depends on the following factors:
<br>1. Consumer Surplus per buyer
<br>2. Producer Surplus ...

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