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Mergers

Mergers. Other Issues. Predatory Pricing Refusal to Deal Tie-in Mergers Cartels. The Economics of Mergers. MC b. MC a. p*. AC b. AC a. q* b. q* a. The Economics of Mergers.

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Mergers

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  1. Mergers Law and Economics-Charles W. Upton

  2. Mergers

  3. Other Issues • Predatory Pricing • Refusal to Deal • Tie-in • Mergers • Cartels Mergers

  4. The Economics of Mergers MCb MCa p* ACb ACa q*b q*a Mergers

  5. The Economics of Mergers If firms A and B merge, they can create a monopoly. Thus mergers are of interest to anti-trust economists and lawyers. MCb MCa p* ACb ACa q*b q*a Mergers

  6. The Economics of Mergers If firms A and B merge, they can create a monopoly. Thus mergers are of interest to anti-trust economists and lawyers. MCb MCa p* Mergers can also promote economic efficiency. ACb ACa q*b q*a Mergers

  7. The Economics of Mergers If firms A and B merge, they can create a monopoly. Thus mergers are of interest to anti-trust economists and lawyers. Initially courts adopted the “big is bad” rule and looked askance at most monopolies. Modern economic theory argues that there can be economic advantages to a merger. MCb MCa p* Mergers can also promote economic efficiency. ACb ACa q*b q*a Mergers

  8. Two Types of Mergers • Horizontal Mergers • Vertical Mergers Mergers

  9. Horizontal Mergers • Two firms producing the same product merge to achieve economies of scale. Mergers

  10. Horizontal Mergers • Two firms producing the same product merge to achieve economies of scale. • Bank A has a huge back office function to clear checks. It can just as easily handle another 500,000 customers. Mergers

  11. Horizontal Mergers • Two firms producing the same product merge to achieve economies of scale. • The right size can change over time Mergers

  12. Horizontal Mergers • Two firms producing the same product merge to achieve economies of scale. • The right size can change over time • McDonald and Douglas aircraft corporations initially merged to compete with Boeing. • Boeing and McDonald-Douglas merge to compete with AirBus. Mergers

  13. Vertical Mergers • A firm in industry A sells its output to industry B. Mergers

  14. Vertical Mergers • A firm in industry A sells its output to industry B. • Two firms merge to integrate their production. Mergers

  15. Vertical Mergers Cereal Companies • A firm in industry A sells its output to industry B. • Two firms merge to integrate their production. Grain Farms Seed and Fertilizer Companies Mergers

  16. Vertical Mergers Cereal Companies • A firm in industry A sells its output to industry B. • Two firms merge to integrate their production. Grain Farms Seed and Fertilizer Companies Mergers

  17. Vertical Mergers Cereal Companies • A firm in industry A sells its output to industry B. • Two firms merge to integrate their production. Basic Theorem: you cannot create monopoly power by a vertical integration. If one industry is monopolized, it does not increase its monopoly power by vertical integration into a competitive industry. Grain Farms Seed and Fertilizer Companies Mergers

  18. Reasons for Vertical Integration • Economies of Scope • A bank that now sells insurance can have one salesman selling both products to the same person. Mergers

  19. Reasons for Vertical Integration • Economies of Scope • A bank that now sells insurance can have one salesman selling both products to the same person. • Economies of Control • A gas company that buys a pipeline does not have to worry about negotiations with the pipeline company. Mergers

  20. Most large mergers require approval from both the Federal Trade Commission and the Monopolies Commission of the European Union. American vs. European Theory Mergers

  21. Most large mergers require approval from both the Federal Trade Commission and the Monopolies Commission of the European Union. US: Is consumer and producer surplus created? If so, approve merger. American vs. European Theory Mergers

  22. Most large mergers require approval from both the Federal Trade Commission and the Monopolies Commission of the European Union. EU test: does this reduce competition? That is, the number of firms selling a product. American vs. European Theory Mergers

  23. Companies in different markets. US saw economies of scope, integration and control. General Electric/Allied Signal Mergers

  24. Companies in different markets. US saw economies of scope, integration and control. EU saw loss of competition. GE would be buying more from Allied Signal and less from other companies. General Electric/Allied Signal Mergers

  25. Companies in different markets. US saw economies of scope, integration and control. EU Saw loss of competition. GE would be buying more from Allied Signal and less from other companies. General Electric/Allied Signal US approved merger, EU did not, and merger died. Mergers

  26. Companies in different markets. US saw economies of scope, integration and control. EU Saw loss of competition. GE would be buying more from Allied Signal and less from other companies. General Electric/Allied Signal US approved merger, EU did not, and merger died. Who was right? Mergers

  27. End ©2004 Charles W. Upton Mergers

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