Companies producing different types of goods involve in vertical merger. It has some negative effects in the economy. In this paper we will discuss about vertical mergers with some real time examples.
Vertical merger occurs when two companies procuring different kinds of goods or offer different services are set to merge. A company may increase its profitability by merging directly with the suppliers. For example, a motorcar manufacturer may merge with a tire company, then this will be called a vertical merger.
A vertical merger may be described as anticompetitive, for it can deprive the supply business from its market competition. For example, if a contractor receiving goods and materials from two different firms and then capture those two firms then, the vertical merger may force the other competitors to give up their businesses. The Federal Trade Commission may set some rules to prevent such kind of mergers if the antitrust laws are violated. Merger between Time Warner Corporation, a giant cable operating company, and Turner Corporation, producer of TBS and CNN. In this case, the Federal Trade Commission was pretty much aware of that fact that such merger could entice Time Warner to create a monopoly in the Television Channel Industry. Although the Federal Trade Commission allowed the merger but it ensured the market competitiveness to protect the consumers.
Vertical Merger Guidelines: A manufacturer may establish a partnership with a distributor. Now, the rival companies will have to face an unfair and tough competition with the newly created company due to the extra advantages that the new company is going get through the merger. That distributor will have no need to pay for the goods and materials because the distributor and the supplier are now a single entity. Previously, the distributor might have to pay a huge amount of money to buy materials. Now, after the merger, the distributor’s expenditure for materials will minimize, for only the base cost of the materials has to be paid. So, the new company will have to pay less money for production of goods. So the Federal Government has set some guidelines of merger to eliminate unfair competition resulted from that kind of merger.
Creating Market Barriers: Due to vertical mergers the rival companies may be prevented from accessing the market inputs or increase the costs of the market inputs. This can further increase the market price or reduce the quality of production. Therefore vertical mergers can create market barriers for which, new companies will find it extremely difficult to enter into the market.
Last Updated on : 29th July 2013