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Economics - Assignment Example

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Horizontal mergers occur when two or more firms in the same industry join on contractual arrangements. The firms must be producing similar products, selling them in the same market and…
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Download file to see previous pages... Vertical mergers occur when a firm that produces an intermediate product merges with another firm that produces a final product/good whose production requires the intermediate good. Time Warner, Prudential Financial and Brook Bond Lipton India Ltd are examples of vertical, conglomerate and horizontal mergers respectively (Layne 69).
Business organizations form mergers because of various reasons. The main ones include the aspect of reducing competition, reducing cost or switching to cost conditions in order to get economies of scope, to increase profitability and to increase market share of particular products just to mention a few (Layne 74). However, it is crucial to note that mergers may not reduce competition incase cournot oligopoly firms exists.
In case of a horizontal merger whereby two firms merge with one being a low cost firm than the other one, the Cournot model formed results to cost of one firm being C1=1 while that of the other firm is C2=4. This is the case because demand (P)=10-Q whereby P and Q are price and quantity respectively. Firms that do not merge face high production cost, hence produce less.
The set up model is a Cournot model because non-merged firms face higher production cost than the merge, thus have low productivity. However, this is applicable in the case of identical firms. The model also increases production, though it reduces consumer welfare. If the Bertrand model would be applied, firm 2 would have produced at all because of high production cost.
The main gains of mergers include the elements of high profitability because of making more sales and the lower competition that is triggered by the existence of one producer (Layne 76). Other benefits include reducing production cost as a result of switching to cost conditions, hence getting economies of scope as well as increasing the market share of particular products. The main disadvantages or losses of mergers include the aspects of some firms ...Download file to see next pagesRead More
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