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October 23, 2014 

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VERTICAL MERGER:

The consolidation of two or more separately-owned businesses, that have an input-output relation, into a single firm. This is one of three types of mergers. The other two are horizontal merger--two competing firms in the same industry that sell the same products--and conglomerate merger--two firms in separate, unrelated industries.
A vertical merger occurs when two or more firms with an input-output relation in the production of a good, join together to form a single firm. An example of a vertical merger is that of a soft drink company merging with a sugar production company. The soft drink company uses the output of the sugar company as an input in the production of soft drinks. If the firms are in unrelated markets, it is a conglomerate merger. If the firms produce competing products, it is a horizontal merger.

Vertical mergers are commonly undertaken by firms as they seek to consolidate their production operations. Newspaper publishing companies, for example, have been known to purchase pulp and paper mills, and even timber companies, to ensure a steady supply of newsprint. Media giants like Disney and Viacom have merged with production companies to ensure a stream of programming as well as television stations to ensure a retail market for their products.

Vertical mergers are considered relatively harmless when in comes to inefficiencies that result from market control. Because a vertical merger is between two firms at various stages in the production a single good, competition is largely unaffected. Each market usually remains as competitive after the merger as before.

Suppose, for example, that Juice-Up, a soft drink firm, merges with Sweet Tooth Sugar Company, a major source of sugar used in the production of Juice-Up. The prime reason for this vertical merger is to ensure a stable input-output arrangement for both firms. Juice-Up benefits by owning the company that supplies a key input needed for soda production. And Sweet Tooth Sugar Company benefits by having a guaranteed buyer for its sugar production.

This vertical merger is relatively harmless because the resulting company is faced with the same competition after the merger as before. Juice-Up must still compete with OmniCola, King Caffeine, Frosty Grape, and others in the Shady Valley soft drink market.

However, while the likelihood of reduced competition is small, vertical mergers can create a few market control problems.

  • One potential problem is if a vertical merger lessens competition in either the input or the output market. Suppose, for example, that Juice-Up already owns another major sugar production firm (formerly know as the Major Sugar Firm) before merging with Sweet Tooth Sugar Company. The vertical merger between Juice-Up and Sweet Tooth Sugar Company can severely restrict competition in the sugar market.

  • Or perhaps Sweet Tooth Sugar Company is a major sugar supplier for all companies in the soft drink market. Once merged with Juice-Up, Sweet Tooth might decide to discontinue business with OmniCola, Super Soda, King Caffeine, Frosty Grape, and others. This could force Juice-Up competitors out of business and lessen competition in the soft drink market.

  • Alternatively, if the Sweet Tooth Sugar Company also already owns OmniCola, Super Soda, King Caffeine, and Frosty Grape, then a vertical merger between Sweet Tooth and Juice-Up can significantly lessen competition in the soft drink market.

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Recommended Citation:

VERTICAL MERGER, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2014. [Accessed: October 23, 2014].


Check Out These Related Terms...

     | merger | conglomerate merger | horizontal 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 |


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


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