loughborough university topic 5 horizontal mergers essay plans to all topic 5 exam questions with extra textbook notes included
loughborough university topic 5 horizontal mergers essay plans
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Topic 5: Essay Plans:
1. What effects can horizontal mergers have on competition?
> Define horizontal merger: A horizontal merger is when two firms operating at the same stage of
the production process combine their assets to create one entity. An example of this would be if
Tesco and Asda merged or Vodaphone and EE.
- Anticompetitive effects may occur following a horizontal merger, these effects have a negative
effect on competition in the market.
- A anti-competitive merger occurs when there is a substantial lessening of effective competition.
Some examples of anticompetitive effects are conglomerate effects, vertical effects unilateral effects
and others which I will discuss.
- Hence mergers that cause these effects may require remedies.
- However horizontal mergers could also be procompetitive due to efficiency effects arising.
> There are 2 main negative cases when considering the effects of horizontal mergers:
1. The merger might allow the merged firm to unilaterally (individually) exercise market power and
raise prices.
2. A merger might favour collusion in the industry. The merger could generate new industry
conditions which enhance the scope of collusion. Prices then increase as firms are more likely to
attain a (tacitly or explicitly) collusive outcome – coordinated effects
Case 1: In the absence of efficiency gains a merger is likely to increase the market power of the
merging firms and decrease both consumer surplus and total welfare
> State the potential anticompetitive effects
- Anticompetitive mergers: a substantial lessening effect of competition.
- Can occur through vertical effects, conglomerate effects, unilateral effects
- Link to Honeywell- GE merger -> ‘To demonstrate some of these effects I will refer to the effects of
the GE-Honeywell merger case which was prohibited in the EU’ + mention any relevant background
info from notes
- Mention ‘In terms of the vertical effects’ point
- Mention ‘In term of the conglomerate effects’ point -> Cut GECAS point but could mention counter
argument instead
- Only mention unilateral effect in words
> Case 2: State result from Bertrand based on differentiated products
- Explain coordinated effects– Linked to Bertrand diagram with differentiated products
- Prices charged by both the merging firms and by the outsider rise
- Both Bertrand and Cournot predict that the overall effect of the merger (in the absence of
efficiency gains) is to reduce consumer surplus because they increase market power. Mergers which
do not entail efficiency gains hurt consumers and society at large.
> Explain why horizontal merger could have procompetitive effects -> Use ‘Williamson tradeoff’
point
- Williamson tradeoff shows that if a merger leads to enough efficiency gains it can enhance welfare
- Explain diagram
- Shows horizontal mergers could have procompetitive effects even in highly concentrated markets
, - Use ‘failing defence argument ‘Slide 5’ in notes
- Shows horizontal mergers could have procompetitive effects even in highly concentrated markets
> Conclusion
- Horizontal merger can cause anticompetitive effects in different ways e.g. through coordinated
effects, unilateral effects, vertical effects etc.
- We can also see in the Honeywell-GE merger case- involved dominant firms which if allowed could
have given the merged firm a competitive advantage, whilst making it harder for rivals to compete->
thus anti-competitive effects could have arose. -> My words
- However the Williamson tradeoff has shown that a horizontal merger could have procompetitive
effects by increasing total welfare.
- Hence in the presence of efficiency gains it can make the merger beneficial from the point of view
of consumer and total welfare and can enhance competition if prices are reduced.
- Moreover the failing defence argument also shows horizontal mergers can actually be beneficial
rather than restricting competition.
- In the absence of efficiency gains mergers can reduce competition between firms e.g. through
raising prices or enhancing the scope of collusion. The exact effect a horizontal merger has on
competition will vary based on different markets.
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