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WELFARE ECONOMICS: A branch of economics that studies efficiency and the overall well-being of society based on alternative allocations of scarce resources. Welfare economics extends the microeconomic analysis of indifference curves to society as a whole. It is concerned with broad efficiency questions and criteria (Pareto efficiency and Kaldor-Hicks efficiency) as well as more specific efficiency issues (market failures, externalities, public goods).

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HORIZONTAL MERGER:

The consolidation of two or more separately-owned businesses, operating in the same industry and producing competing products, into a single firm. This is one of three types of mergers. The other two are vertical merger--two firms in different stages of the production of one good--and conglomerate merger--two firms in separate, unrelated industries.
A horizontal merger occurs when two or more firms in the same market, producing substitute products, join together to form a single firm. An example of a horizontal merger is that of two soft drink companies. The firms are competitors producing similar products. If the firms are in different markets, it is a conglomerate merger. If the firms have an input-output relation, it is a vertical merger.

A number of industries have seen horizontal mergers among competing firms in recent years. This has been common in the banking industry, practiced by such firms as Bank of America and MBNA. In years past, General Motors expanded through the horizontal merger of individual car companies (Chevrolet, Buick, Cadillac, Oldsmobile, and Pontiac). The petroleum industry has recently produced firms such as Exxon Mobile, ChevronTexaco, and ConocoPhillips formed by horizontal mergers.

Horizontal mergers are among those most closely watched by the Department of Justice as it seeks to enforce antitrust laws and promote efficient competition. Because market efficiency depends on the market control of each firm, which depends on the number of competitors, concern arises if that number declines. Fewer competitors mean each firm has more market control and the overall industry tends to be less efficient. Whenever two competitors undertake a horizontal merger, competition is likely to decline.

The hypothetical Shady Valley soft drink market offers one example of a horizontal merger. The two largest competitors in this market are OmniCola and Juice-Up. A horizontal merger results if these two companies merge to form a single company (call it OmniUp). Such a merger concerns antitrust enforcers because OmniCola, with 23 percent of the market, and Juice-Up, with 17.5 percent of the market, gives the new OmniUp firm over 40 percent of the market. The next largest competitor is Super Soda, with a relatively small 11.25 percent of the market. This merger raises the four-firm concentration ratio from 61.25 to 67.50 and the Herfindahl Index from 1177 to 1982.

Alternatively, a horizontal merger between the third and fourth largest firms in the Shady Valley soft drink market might actually increase competition. A merger between Super Soda, with 11.25 percent of the market, and King Caffeine, with 9.5 percent of the market creates a larger firm (call it Super Caffeine) with over 20 percent of the market. Even though the four-firm concentration ratio rises from 61.25 to 67.50 and the Herfindahl index increases from 1177 to 1390, this new firm is then able to offer greater competition for the two largest firms, OmniCola and Juice-Up. Three firms of nearly equal size might be preferred by the Department of Justice to two firms that are significantly larger than the rest.

<= HORIZONTAL EQUITYHOUSEHOLD SECTOR =>


Recommended Citation:

HORIZONTAL MERGER, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2021. [Accessed: December 6, 2021].


Check Out These Related Terms...

     | merger | conglomerate merger | vertical merger | collusion | explicit collusion | implicit collusion |


Or For A Little Background...

     | oligopoly | oligopoly, behavior | oligopoly, characteristics | industry | market structures | market control | firm | industry | competition among the few | short-run production analysis | profit maximization | production |


And For Further Study...

     | market share | concentration ratios | four-firm concentration ratio | eight-firm concentration ratio | Herfindahl index | barriers to entry | product differentiation | game theory | cartel | kinked-demand curve |


Related Websites (Will Open in New Window)...

     | Antitrust Division, U.S. Department of Justice |


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