What is the term for the joining of two or more firms involved in different stages of producing
Growth of firmsThe long run for a single firm is entered when it uses more fixed and variable factors to increase its scale of production. Show
The long run average cost curve (LRAC)A typical long run cost curve is ‘U’ shaped because of the impact of economies and diseconomies of scale. GrowthFirms grow in order to achieve their objectives, including increasing sales, maximising profits or increasing market share. Firms grow in two ways; by internal expansion and through integration. Internal expansionTo grow organically, a firm will need to retain sufficient profits to enable it to purchase new assets, including new technology. Over time, the total value of a firm’s assets will rise, which provides collateral to enable it to borrow to fund further expansion. The importance of brandingOne of the most common strategies for internal growth is to build the firm’s brand, which provides the firm with many advantages. Once a brand is established, less advertising is required to launch new products. Internal growth often provides a low risk alternative to integration, although the results are often slow to arrive. External expansionThe second route to achieve growth is to integrate with other firms. Firms integrate through mergers, where there is a mutual agreement, or through acquisitions, where one firm purchases shares in another firm, with or without agreement. There are several types of integration, including: Vertical integrationVertical integration occurs when firms merge at different stages of production. There are two types of vertical integration, backwards and forwards. BackwardsBackward vertical integration occurs when a firm merges with another firm which is nearer to the source of the product, such as a car producer buying a steel manufacturer. ForwardsForwards vertical integration occurs when a firm merges to move nearer to the consumer, such as a car producer buying a chain of car showrooms. Horizontal integrationHorizontal integration occurs when firms merge at the same stage of production, such as a merger between two car producers, or two car showrooms. Horizonal integration is also referred to as lateral integration. Conglomerate integrationConglomerate, or diversified, integration, occurs when firms operating in completely different markets, merge – such as a car producer merging with a travel agency. In this case, firms tend to retain their original names, and are owned by a ‘holding’ company. Test your knowledge with a quizPress Next to launch the quizYou are allowed two attempts – feedback is provided aftereach question is attempted. Multi-nationalsMany firms grow by integrating with foreign firms, which is increasingly common in the globalised world economy, and is a key part of the globalisation process. Cross-border mergers contribute to inward investment between countries. The UK is a major global investor, and in 2013 was second in the world league table for receiving FDI (Foreign Direct Investment), with inward investment of $1.6tr. (Source: UNCTAD, 2013). Mergers and acquisitions account for a large share of FDI. Bank mergersLike all firms, banks can derive considerable benefits from merging, including economies of scale. In addition, there are considerable benefits to financial institutions from merging rather than expanding organically. Over time, banks will have built up a range of low, medium, and high-risk borrowers. To expand organically, a bank may have to take on higher risk customers. However, if a bank acquires another bank it will not need to increase its average risk because it will acquire a range of customers of all risks. Banks can also merge to help secure extra liquidity. The advantages of mergersMergers can generate a number of advantages:
Disadvantages of mergers
Policy towards mergersIn the UK mergers are assessed in terms of the specific circumstances of each case. Substantial Lessening of Competition (SLC)There are several considerations when making an assessment of a merger – the most important of which is whether there will be a substantial lessening of competition (SLC). This refers to the potential loss of competition which may result from a merger. There are considered to be three main categories where a merger can lead to a lessening of competition: Unilateral effectsUnilateral effects arise when a single combined firm is able to raise prices in a profitable way given the lessening of competition that follows the removal of a rival. The closeness of the firms as substitutes for each other will clearly have a bearing on the assessment of unilateral effects. Co-ordinated effectsCo-ordinated effects occur when several firms are more likely to jointly increase their price. For example, firms may carve-up a market in a geographical way, and with less competition raise their price. In this instance production may be limited or innovation stifled. Tacit collusion is example of a co-ordinated effect. Vertical effectsFinally, vertical effects are associated with vertical integration and may arise when a merger strengthens the ability of the merged firm to exert its power in the market. The counterfactual situationIn deciding whether a merger will lead to a substantial lessening of competition the OFT or CC will consider the likely foreseeable competitive situation that would have arisen if the merger had not gone ahead – called the counterfactual. For example, it may be likely that a new firm would have entered the market were it not for the merger. It is also possible that one of the merged firms may have left the market had the merger not gone ahead. The authorities (the OFT and CC) may also consider, as part of the counterfactual analysis, whether a different bidder would have come forward. What is the combination of two or more firms involved in different stages?Vertical mergers combine two or more firms involved in different stages of producing the same good or service. A conglomerate is a business combination merging more than three businesses that make unrelated products.
What do we call the combining of 2 or more firms involved in different stages of producing the same good or service?A vertical merger is the merger of two or more companies that provide different supply chain functions for a common good or service. Most often, the merger is effected to increase synergies, gain more control of the supply chain process, and ramp up business.
What is it called when two companies join together?A company merger is when two companies combine to form a new company. Companies merge to expand their market share, diversify products, reduce risk and competition, and increase profits.
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