Which of the following types of mergers can reduce competition and create a monopoly market? O a. Geographic extension mergers O b. Horizontal mergers Product extension mergers d. Forward integration. O c.
Answers
KEY TAKEAWAYS
A horizontal acquisition is a business strategy where one company takes over another that operates at the same level in an industry.
Vertical integration involves the acquisition of business operations within the same production vertical.
Horizontal integrations help companies expand in size, diversify product offerings, reduce competition, and expand into new markets.
Vertical integrations can help boost profit and allow companies more immediate access to consumers.
Companies that seek to strengthen their positions in the market and enhance their production or distribution stage use horizontal integration.
Horizontal Integration
Horizontal Integration
When a company wishes to grow through horizontal integration, its primary goal is to acquire a similar company in the same industry. Other goals include increasing in size, creating economies of scale, increasing market power over distributors and suppliers, increasing product or service differentiation, expanding the company's market or entering a new market, and reducing competition.
For example, if a department store wants to enter a new market, it may choose to merge with a similar one in another country to start operations overseas. The goal of doing so would be to create more revenue after the merger. Ideally, the company would make more money than when they were two independent companies.
A newly-merged company can cut down on costs by sharing technology, marketing efforts, research and development (R&D), production, and distribution.
Horizontal integration works best when the two companies have synergistic cultures. Horizontal integration may fail if there are problems when merging the two company cultures.
Pros and Cons of Horizontal Integration
While there can be many benefits to horizontal integration, the most obvious benefit is an increased market share for the company. When two companies combine, they also combine their products, technology, and the services that they provide to the market. And when one company multiplies its products, it can also increase its consumer foothold.
Along those same lines, companies can benefit from a larger customer base after horizontal integration. By merging two businesses into one, the new organization now has access to a larger base of customers.
When a company's customer base increases, the new company can now boost its revenue. Finally, companies that opt for horizontal integration benefit from reduced competition in their industry, increasing the synergy between two companies (including marketing resources), and reducing some production costs.
Even though a horizontal integration may make sense from a business standpoint, there are downsides to horizontal integration for the market, especially when they succeed. This kind of strategy faces a high level of scrutiny from government agencies. Merging two companies that operate within the same supply chain can cut down on competition, thereby reducing the choices available to consumers.
If that happens, it may lead to a monopoly, where one company plays a dominant force, controlling the availability, prices, and supply of products and services. Big mergers like these are the reason why antitrust laws are in place. Antitrust laws are intended to prevent predatory mergers and acquisitions that may create a monopoly. where one company has too much influence and a high market concentration.
After horizontal integration, the new, larger company may take advantage of consumers by raising prices and narrowing product options.
In addition, there are other potential drawbacks to horizontal integration, including reduced flexibility within the new organization. Prior to horizontal integration, the two companies may have been able to operate more nimbly, but now the new company is a larger organization. With more employees and internal processes, a company is now beholden to more bureaucracy and a greater need for transparency. Finally, if there is not synergistic energy between the two companies, despite the costs of the process, horizontal integration can fail. This can result in a reduction of value between the two companies, rather than adding value to the operation.