One way that companies can create a monopoly is by merging or acquiring other companies. These moves can be made horizontally, vertically, or as a conglomerate. Explain the differences between the three types of mergers (horizontal, vertical and conglomerate). What might the benefits be for each type of merger? When do you think mergers are most likely to be challenged by the regulatory agencies? Explain.

Horizontal mergers happen between two companies that make or sell the same or a similar product. Vertical mergers happen between companies in the same industry but in different stages of production. Conglomerate mergers occur between companies in different industries. Regulatory agencies watch closely for increasing prices, decreasing competition, and possible monopolies.

Expert Answers

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Let's begin by looking at the three different kinds of mergers companies can make. Horizontal mergers occur when companies that make and/or sell the same kinds of products join together. If two companies that both manufacture computers merge, for instance, this is a type of horizontal merger. This kind of merger is beneficial to companies because it decreases competition and may allow the merged company to increase prices.

Vertical mergers occur when a company in a particular industry merges with a company that is in the same industry but occupies a different stage in the production process. When, for instance, a soda company merges with a chain of restaurants in which that soda is sold, it is a vertical merger. The benefit here is obvious. One company will have a consistent market for its product while the other will have a consistent supply.

Conglomerate mergers happen when two companies from different industries merge. Sometimes those industries are related somehow; other times they are not. When an online media retailer merges with a grocery chain, for instance, they make a conglomerate merger. The benefit of a merger like this is the expansion of a company into new fields and markets.

Regulatory agencies keep a close watch on mergers. They are especially likely to challenge those that significantly decrease competition in the marketplace and even threaten to create a monopoly. In cases like this, prices tend to rise, and consumers have fewer choices about where they will spend their money.

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