the cost of production. It is not an easy task to determine the optimal inputs t
ID: 1156842 • Letter: T
Question
the cost of production. It is not an easy task to determine the optimal inputs to minimize the cost to produce a certain amount of output. In relation to the cost of production, we discussed economies of scale. Economies of scale simply mean that a firm can decrease per unit production cost by increasing its output to a certain level. One reason why Walmart offers low prices is economies of scale. In this regards, it may be seen as cost effective to have two firms to be merged under one firm and achieve a higher level of efficiency. In this chapter, however, we are discussing the structure of the market and that it may not be ideal for firms to merge, either horizontal or vertical (non-horizontal).
Department of Justice (DOJ) and Federal Trade Commission(FTC) have two guidelines named “Horizontal Merger Guidelines” and “Non-Horizontal Merger (Vertical Merger) Guidelines” that discuss effects of a merger and defines the position of these two agencies in evaluating the anti-trust cases. I find both guidelines extremely helpful. Please read both guidelines and try to understand how FTC and DOJ approach mergers. ( I am not asking you to study these two documents but expecting you have a quick yet concentrated read it once to understand the factors they take into account while evaluating a merger case. This reading will help you understand different market structures and factors of competition in coming chapters.)
Assume that there are 5 premium natural and organic supermarkets in the city. Whole Foods, having a share of 20% decided to acquire Trader Joe’s which has a market share of 15%. The other three supermarkets have 10%, 25%, and 30% market shares.
Please discuss potential advantages (efficiency gains) and disadvantages of such acquisition. How do you think this will impact prices, consumers, the profitability of the firms, competition, product offering, etc.?
If you were the judge to authorize the acquisition or not, what would your decision be? Why
Explanation / Answer
Horizontal integration occurs when a company decides to merge, acquire or take over another company in the same industry and at the same stage of production. Whole foods acquiring trader Joe is a horizontal merger/acquisition. The market share of Whole foods will increase from current 20% to 35% which will be the largest compared to other competitors.
A company that seeks to expand through a horizontal integration can achieve economies of scale, economies of scope, increased market power or market share, reduction of production costs, reduction of competition and increases in other synergies. However, a company that decides to integrate horizontally must face disadvantages that include antitrust issues and legalities, the fact that the expected economic gains might never be realized, the reduction in flexibility and the potential of actually destroying value rather than creating it.
When a company can achieve the advantages of a horizontal integration, the company can diversify its products or services, sell those products or services to a larger market, reduce the costs to produce its newly diversified products or services, and reduce the amount of external competition.
When horizontal integration hampers a company, the worst disadvantage the company can face is a reduction in overall value to the firm because the expected synergies never materialize, despite the costs of the horizontal integration. Other disadvantages can include legal repercussions if the horizontal merger results in a company that may be considered a monopoly and a reduction in flexibility due to the fact that it is now a larger organization.
Effect on consumers
Prices
The effect of mergers on consumers can be positive or negative, depending on the industry and the market competition. By eliminating at least one competitor, a merger may allow the remaining companies to implement coordinated price increases. However, a merged entity may also pass on cost savings to consumers through lower prices. However, if the merger results in only one or two retailers serving the entire market, individual and small-business customers may pay more.
Variety
Mergers can decrease or increase the choices available to consumers, but it may also allow the combined company to save costs and compete with discount airlines on other routes. Small-business mergers can also affect consumer choices. On the other hand, a merger between two money-losing retail stores may lead to a reduction in the number of items on sale as the combined entity looks to reduce overhead costs and drive profits.
Quality
Mergers may improve product quality, which benefits consumers. the merger of two companies could result in better quality products and faster time-to-market as the merged entity takes advantage of the research capabilities and facilities of their legacy companies. These quality improvements may come at lower costs because the merged entity may be able to eliminate certain overhead expenditures, such as facility rental and administrative support.
From Company’s point of view:
The biggest advantage of horizontal merger is that it reduces the competition by reducing the number of companies which are there in the industry and hence company has to spend less time on taking undue stress about how to tackle competition and can concentrate more on improving its product and giving the customer best services by producing good quality product at lowest price.
It is easier for top management of the acquiring company to manage the target company which is in the same business rather than acquiring taking over that company which has completely different business and hence chances of top management successfully handling both the companies increases in case of horizontal merger.
The biggest disadvantage of this type of merger is that it increases the chances of merged company having monopoly powers due to sheer big size of merged company and we all know that a company having monopoly powers will tend to exploit customers by charging higher price than normal from its customers and hence in the end it is the customer who has to suffer.
Another disadvantage of this type of merger is that it is difficult to integrate the culture, employee behavior and other such things of two companies which are merged and if company is unable to achieve the integration then the whole idea of merging two businesses will go out of window and it will result in failure of the merged entity.
Although there are positives and negatives to this acquisition, the advantages outweigh the disadvantages. This merger may be able to tackle the individual business problems both firms would have been facing before the merger, the benefit of economies of scale would be passed down to consumers in form of reduced prices, if trader joe would be running in loss, then it would be saved by this merger.
If this answer's your Question, a thumbs up to this solution would be appreciated.
Thankyou
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.