December 2, 2023 

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BUILDING CYCLE: The recurring periods of first active and then stagnant home sales and housing construction. A complete cycle usually lasts from 15 to 20 years. The source of these ups and downs rests with the competitive nature of the home construction business, the length of time it takes to build a house and, perhaps most importantly, the length of time before a house depreciates.

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The consolidation of two or more separately-owned businesses under single ownership. Mergers fall into one of three classes--(1) horizontal between firms that sell competing products in the same market, (2) vertical between firms in different stages of the production of one good, and (3) conglomerate between firms that are in separate industries. Because horizontal mergers tend to reduce competition, they are most likely to be scrutinized by government. Mergers are one of several behavioral inclinations of oligopoly. A related oligopolistic behavior is collusion.
Mergers occur when two or more separately-owned businesses are consolidated under single ownership. A merger can be accomplished through a mutual "friendly" agreement by both parties, or through a "hostile takeover" in which one business acquires ownership without cooperation from the other.

Mergers, especially horizontal mergers, are a characteristic trait of oligopolistic industries. Intense competition and interdependent decision-making encourages oligopolistic firms to cooperate. One way to lessen the competition among an oligopolistic rival is to join forces through a merger. The other way is through collusion.

Mergers fall into one of three classes--(1) horizontal--two competing firms in the same industry that sell the same products, (2) vertical--two firms in different stages of the production of one good, such that the output of one business is the input of the other, and (3) conglomerate--two firms that are in totally, completely separate industries.

Horizontal Merger

A horizontal merger results if two or more competing firms merger into a separate firm. Consider the hypothetical Shady Valley soft drink market to illustrate. A horizontal merger results it two soft drink competitors, such as OmniCola and Juice-Up, legally combine to form a single firm. Such a horizontal merger could occur by OmniCola and Juice-Up merging on fairly equal terms (forming a new company that might be called OmniUp), or it could be that one firm effectively "buys" the other. That is, OmniCola might simply buy enough of Juice-Up's corporate stock to give it controlling interest in the company.

Because a horizontal merger is between competitors in the same market or industry, it tends to reduce competition and increase the market control of the remaining firms, especially the newly merged firm.

Because horizontal mergers tend to lessen competition in an oligopolistic industry, they are also closely scrutinized by the Department of Justice, the prime enforcer of antitrust laws. Most big-time mergers, those among industry leaders, are typically reviewed by the Department of Justice for their potential impact on competition.

However, in some cases, a merger between two competing firms is actually encouraged by the Department of Justice as a means of increasing, rather than reduce competition. How so? If the merger is between the second and third largest firms in the industry, and the resulting merged firm is about the same size as the largest firm, then such a merger might get an easy thumbs-up. The logic is that two firms of nearly equal size would tend to be more competitive than one large firm and two smaller ones.

Vertical Merger

A vertical merger occurs if two or more firms in different stages of the production of a good merge to form a new company. In particular, a vertical merger arises if a company that produces the output merges with another company that supplies an input. Such a merger is illustrated by the hypothetical Shady Valley soft drink industry if OmniCola, a leading soft drink producer, merges with Sweet Tooth Sugar Company, which supplies the sugar used to produce OmniCola.

A vertical merger is generally pursued to stabilize the input-output connections needed for production. Rather than relying on a separate company to supply a vital input like sugar, by merging with Sweet Tooth Sugar Company, OmniCola controls the supply of this input.

While vertical mergers are generally harmless when it comes to market control and competition, and do not usually come under government scrutiny, problems can arise. If, for example, Sweet Tooth Sugar Company is also a primary source of sugar for other companies in the Shady Valley soft drink market, then OmniCola might use control of this company to charge competitors higher prices and place them at a competitive disadvantage.

Conglomerate Merger

A conglomerate merger happens when two firms in totally different industries merge. If, for example, The Master Foot Company, a leading manufacturer of athletic shoes, merges with Juice-up, one of our soft drink firms, then a conglomerate merger occurs.

Conglomerate mergers are also considered relatively harmless when it comes to restricting competition and increasing market control. Suppose The Master Foot Company, a leading manufacturer of athletic shoes, merges with Juice-up, a soft drink firm. The resulting company (call it Juicy Foot) is faced with the same competition in each of its two markets after the merger as the individual firms were before the merger. The Master Foot division of Juicy Foot must still compete with OmniRun. And the Juice-Up division of Juicy Foot must still compete with OmniCola, King Caffeine, Frosty Grape, and others in the soft drink market.


Recommended Citation:

MERGER, AmosWEB Encyclonomic WEB*pedia,, AmosWEB LLC, 2000-2023. [Accessed: December 2, 2023].

Check Out These Related Terms...

     | conglomerate merger | horizontal 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 | barriers to entry | product differentiation | game theory | cartel | kinked-demand curve |

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

     | U.S. Chamber of Commerce | Better Business Bureau |

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