Vertical, Conglomerate, and Horizontal Mergers - Assignment Example

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).
2) What are the underlying reasons for mergers? Explain.

Business organizations form mergers because of various reasons. The main ones include the aspect of reducing competition, reducing cost, or switching to cost conditions to get economies of scope, increase profitability, and increase the market share of particular products just to mention a few (Layne 74). However, it is crucial to note that mergers may not reduce competition in case Cournot oligopoly firms exist.

3) a) Set up the economics (the model) and derive the solution or a horizontal merger including an analysis of economic welfare.
In the 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 in the cost of one firm being C1=1 while that of the other firm being 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 costs, hence produce less.

b) Have you set up a Cournot, Bertrand, or a monopoly model solution? Explain, and give your analysis.
The setup model is a Cournot model because non-merged firms face higher production costs than the merger and 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 the high production cost.

4) What are the gains and losses of mergers? Outline these gains and losses
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 costs 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 joining the merger just to bring prestige hence overvaluing actions like advertising. Other losses include diseconomies of scale whereby the new firms may experience this effect from the increased size.

5) What are the merger guidelines of the H-S-R Antitrust Improvements and the Sherman Antitrust Act? Explain.
The Sherman Antitrust Act, Section 1, prohibits the formation of mergers to reduce competition in the market. This act was enacted in 1890 and it disallows the formation of mergers between directly competing firms. However, the act is not strong in a way it can stop mergers (Layne 96). The Hart-Scott-Rodino Antitrust Improvements Act on the other hand requires companies to notify FTC and DOJ before forming a merger. The regulation strictly requires companies with sales of assets more than $100 million and are acquiring a company valued at least $15 Million to report that acquisition.

6) Provide us with the underlying economics and value of a patent
The primary purpose of patents is to encourage innovation by a way of providing a monopoly whereby the inventor (assignee) secures exclusive rights over the innovation or invention, hence getting a financial reward in the marketplace (Ikenson 35). Read More