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Mergers

A merger is an integration of two or more firms under a single ownership. Mergers play an important role in a free enterprise economy, in that; less efficient firms are swallowed by the more efficient. Thus, mergers often result in redeployment of productive assets and facilitate the efficient flow of investment capital. But it is also possible for mergers to have an adverse effect on competition by:

1. Reducing the number of firm capable of entering concentrated markets.

2. Reducing the number of firm with the capability and incentive for competitive innovation.

3. Increasing the barriers of entry in concentrated markets.

4. Diminishing the vigoru of competition by increasing actual and potential customer – supplier relationship among leading firm in concentrated markets.

5. Mergers may be classified as horizontal, vertical or conglomerate.

Horizontal Mergers: A horizontal merger is one in which different plants producing similar products are brought under a single ownership. Three reasons are often advanced for such expansion.

1. To meet the demand of a growing market.

2. To take advantage of economies of scale in production and distribution

3. To increase market share and market power.

Vertical Mergers: A vertical merger is one in which firm engages in different stages of the chain of production and distributions are united under one ownership. For example, a manifesting firm might integrate backwards to obtain control of a source of raw material or forward to obtain control of sales outlets for its products.

Conglomerate Merges: A conglomerate merger is one in which different companies producing different products are brought under a single ownership. Such diversification enables the acquiring company to spread risk, find good use idle capital, add a line of products to its marketing capacity or simply gain in economics power.

In fact, the economics behavior of firms needs analysis on a case by-case basis. The real world business is so complex that the market behavior of firms defies any theoretical generalizations. Keeping this in mind, we move on to take stock of several behavior models and economic theory of the form.