What are the differences between vertical and hortizontal mergers?

Answer 1

Vertical Mergers
A vertical merger is one in which a firm or company combines with a supplier or distributor. This type of merger can be viewed as anticompetitive because it can often rob supply business from its competition. If a contractor has been receiving a material from two separate firms, and then decides to acquire the two supplying firms, the vertical merger could cause the contractor’s competitors to go out of business (say, if General Motors were to buy up Bridgestone Tyres and Michelin Tyres). Antitrust concerns are a focal point of investigation if competition is hurt. The Federal Trade Commission can rule to prevent mergers if they feel they violate antitrust laws.

Guidelines
Vertical mergers involve a manufacturer forming a partnership with a distributor. This makes it hard for competing companies to compete with the newly merged company because of the advantages that the merger brings. These benefits occur because the distributor no longer has to pay the supplier for material any longer because the supplier and distributor are now one entity. Formally, the distributor would have had to pay the supplier enough money to cover the cost of the material plus whatever the supplier charged in order to make a profit on the transaction. With the two companies merged, the distributor is free to get the material at base cost and does not have to pay any extra to another company that is looking to make a profit. This allows for the merged company to have less money tied up in production of a good.

Example of Vertical Merger
Vertical mergers can best be understood from examining real world deals. One such merger occurred between Time Warner Incorporated, a major cable operation, and the Turner Corporation, which produces CNN, TBS, and other programming. In this merger, the Federal Trade Commission (FTC) was alarmed by the fact that such a merger would allow Time Warner to monopolize much of the programming on television. Ultimately, the FTC voted to allow the merger but stipulated that the merger could not act in the interests of anti-competitiveness to the point at which the public good was harmed.

Horizontal Mergers
A horizontal merger is when two companies competing in the same market merge or join together (say, if McDonald's were to merge with Burger King). This type of merger can either have a very large effect or little to no effect on the market. When two extremely small companies combine, or horizontally merge, the results of the merger are less noticeable. These smaller horizontal mergers are very common. If a small local drug store were to horizontally merge with another local drugstore, the effect of this merger on the drugstore market would be minimal. In a large horizontal merger, however, the resulting ripple effects can be felt throughout the market sector and sometimes throughout the whole economy.

Large horizontal mergers are often perceived as anticompetitive. If one company holding twenty percent of the market share combines with another company also holding twenty percent of the market share, their combined share holding will then increase to forty percent. This large horizontal merger has now given the new company an unfair market advantage over its competitors.

Answer 2

A horizontal merger is a merger where two entities having approximately the same size and ratings merge. Exxon and Shell merging would be a horizontal merger. A vertical merger is a merger where one of the entities is much larger than the other. AT&T merging with Ajax Communications would be a vertical merger.

Answer 3

A horizontal merger is a merger between two competitors. Suppose, for example, that tomorrow Pepsi were to buy Coca-Cola. This would be a horizontal merger.

A vertical merger occurs when a supplier buys a reseller, or vice versa. Suppose that a jewelry retailer purchased a company that manufactures jewelry, this would be a vertical merger.