CHAPTERSI

DI
VERSI
FICATI
ON,
VERTI
CALI
NTEGRATI
ONAND
MERGER

Pr
ompt
ingQuest
ions:

 Somef
ir
msar
epr
oduci
ngdi
ff
erentpr
oduci
ngdi
ff
erentt
ypesofpr
oduct
s;why
?
 Equal
l
ycompet
it
ivef
ir
msar
esomet
imest
ryi
ngt
omer
geeachot
her
.whatar
e
t
hei
ntent
ionsbehi
nd.

Desi
redObj
ect
ives

Ther
eaderwi
llgetacquai
ntedwi
th

 Themeani
ng and basi
cconcept
sofDi
ver
sif
icat
ion,Ver
ti
calI
ntegr
ati
on and
Mer
ger
 Mot
ivesf
orDi
ver
sif
icat
ion,
Ver
ti
cal
Int
egr
ati
onandMer
ger
 Empi
ri
cal
evi
dences
 I
mpl
i
cat
ionsf
orpubl
i
cpol
i
cies

1
I
ntr
oduct
ion

Di
ver
sif
icat
ion,Ver
ti
calI
ntegr
ati
onandMer
gerar
ethr
eei
mpor
tantel
ement
sofmar
ket
st
ruct
[Link]
lthet
hreear
enodoubtdi
ff
erentbutcl
osel
yint
erl
i
[Link]
l
lther
efor
e
st
udyt
hem t
oget
heri
nthecomi
ngdi
scussi
[Link]
mmedi
atet
askbef
oreusi
sto
def
inet
heseconcept
sfi
rst
.Thenwewi
l
lbedi
scussi
ngt
hemot
ivesbehi
ndt
hem,and
t
hen,
exa¬mi
net
hem i
nthecont
extofpubl
i
cpol
i
cy.

6.
1Def
ini
ti
ons

[Link]
ver
sif
icat
ion

I
nor
dert
odef
inet
heconceptdi
ver
sif
icat
ion,l
etusst
artwi
thasi
mpl
esi
tuat
ion.
Supposeaf
ir
m pr
oducessomev
ari
eti
esofapr
oductwhi
char
ecl
osesubst
it
utesf
or
eachot
heri
nthemar
ket
,ift
hef
ir
m addsonemor
evar
iet
yoft
hepr
oductt
heni
tisnot
di
ver
sif
icat
[Link]
mpl
ycal
li
tpr
oductv
ari
ati
onordi
ff
erent
iat
[Link]
eri
,ft
he
f
ir
m pr
oducesat
otal
lydi
ff
erentpr
oductwhi
chi
snotasubst
it
utef
ort
heexi
sti
ng
pr
oduct
sint
hemar
kett
heni
tiscal
leddi
ver
sif
icat
[Link]
ir
m pr
oduci
ngmar
gar
ine
st
art
spr
oduci
ngsoap,f
orexampl
[Link]
scomesunderdi
ver
sif
icat
[Link]
mil
arl
y,whena
l
eat
hert
anni
ngf
ir
m st
art
smanuf
act
uri
ngboot
sandot
herl
eat
hergoods,wewi
l
lthen
cal
litdi
ver
sif
icat
ionbecauseher
ethepr
oduct
sar
edi
ff
erentasar
esul
tofwhi
cht
he
mar
ket'
area'f
ort
hef
ir
m expandsf
rom onecl
assofconsumer
sto anot
herone.
Di
ver
sif
icat
ioni
st t
hus"hespr
eadi
ngofi
tsoper
ati
onsbyabusi
nessoverdi
ssi
mil
ar
econo¬mi
cact
ivi
ti
es"
.Accor
ding t
o Penr
ose,af
ir
m i
ssai
dto di
ver
sif
y,whenev
er,
wi
thoutent
ir
elyabandoni
ngi
tsol
dli
nesofpr
oduct
,itembar
ksupont
hepr
oduct
ionof
newpr
oduct
s,i
ncl
udi
ngi
nter
medi
atepr
oduct
s,whi
char
esuf
fi
cient
lydi
ff
erentf
rom t
he
ot
herpr
oduct
sitpr
oducest
oimpl
ysomesi
gni
fi
cantdi
ff
erencei
nthef
ir
m'spr
oduct
ion
anddi
str
ibut
ionpr
ogr
ammes.I
nthepr
ocessofdi
ver
sif
icat
ion,
afi
rm makessi
gni
fi
cant
changesi
nit
s'ar
eas'ofoper
ati
onsr
elat
edt
otechnol
ogi
calbase,mar
ketar
easand
pr
o¬duct
iveact
ivi
ti
esi
nwhi
chi
thasacqui
redex
per
ienceorknowl
edgei
nthepast
.Four
di
ff
erentpossi
bil
i
tieshav
ebeenment
ionedbyPenr
osef
ort
his:

2
(
i) Whent
her
ear
eaddi
ti
onalpr
oduct
swi
thi
nthef
ir
m'sexi
sti
ngt
echno¬l
ogi
cal
basesandmar
ketar
eas;
(
ii
) Whent
her
ear
epr
oduct
sinv
olv
ingt
heex
ist
ingt
echnol
ogi
calbasesbutdest
ined
t
onewmar
ketar
eas;
(
ii
i) Whent
her
ear
epr
oduct
swhi
chi
nvol
veal
toget
hernew t
echnol
ogi
calbasesf
or
t
heexi
sti
ngmar
ket
s;and
(
iv) Whent
her
ear
enew pr
oduct
swi
thnew t
echno¬l
ogi
calbasesf
ornew mar
ket
ar
eas.

Whenaf
ir
mint
roducesnewpr
oduct
sther
ewi
l
lbeachangei
npr
oduct
iveser
vicesand
mar
ket
ingar
easoract
ivi
[Link]
i ver
sif
icat
iont
huscannotbeconcei
vedofchangesi
n
t
hepr
oduct
sonl
y;i
timpl
iest
heot
hert
woaspect
soft
hechangeal
so,i
.[Link]
n
t
het
echnol
ogi
calbaseandmar
ketar
eas.

[Link]
ti
calI
ntegr
ati
on

I
tref
erst
ooper
ati
onsbyaf
ir
mint
woormor
eindust
ri
esr
epr
esent
ingsuccessi
ve
st
agesi
nthef
lowofmat
eri
alsorpr
oduct
sfr
om anear
li
ert
oal
aterst
ageofpr
oduct
ion
orv
icev
[Link],i
tisat
ypeofdi
ver
sif
icat
ionbuti ookedas'
tmaybel ver
ti
cal
concent
rat
ion'
,andi
fthepr
ocesst
akespl
acebymer
gingoft
wodi
ff
erentf
ir
mst
heni
tis
'
ver
ti
calmer
ger
'.How¬ ever
,ver
ti
cali
ntegr
ati
on i
s a popul
art
erm f
oral
lthese.
Essent
ial
l
y,i
tist
hei
ntegr
ati
onamongt
hei
nter
medi
atepr
oduct
susedi
ntr
oduct
ionofa
commodi
ty.I
tmaybei
nit
iat
edi
nei
therwayi
.[Link]
ir
mit
sel
fst
art
smanu¬f
act
uri
ngal
lof
t
hem ordi
ff
erentf
ir
mspr
oduci
nggoodsatdi
ff
erentst
agesoft
hepr
ocessmer
ge
t
oget
her
.

[Link]
ger

Thet
erm mer
gerr
efer
stoamal
gamat
ionori
ntegr
ati
onoft
woormor
efi
[Link]
ir
ms
underdi
ff
erentowner
shi
pandmanagementcont
rol
scomeunderauni
fi
edonet
hrough
mer
ger
.Thet
erms'
acqui
sit
ion'and'
takeover
'ar
eal
sousedf
ormer
ger
,whi
chi
mpl
i
es
t
hataf
ir
m acqui
resasset
sorst
ocksi
npar
torf
ull
,ofot
herf
ir
m orf
ir
mst
oget

3
oper
ati
onalcont
rolov
ert
hem.I
nlegalsense,t
her
eisdi
ff
erencebet
weent
heset
erms
butf
rom t
hepoi
ntofv
iew oft
heeconomi
canal
ysi
stheyar
eal
i
[Link]
mpor
tant
f
eat
ureofmer
geri
sthet
ransf
erofcont
rolofbusi
nessact
ivi
tyf
rom onef
ir
m orf
ir
mst
o
anot
her
.

Si
tuat
ionsofmer
ger
:

1)Ahor
( izont
ali
ntegr
ati
onormer
geroff
ir
mswhosepr
oduct
sar
evi
ewedbybuy
ersas
i
dent
ical
thati
sthei
rpr
oduct
shav
ehi
ghcr
ossel
ast
ici
tyofdemandandsuppl
y;

2)Av
( ert
icali
ntegr
ati
onormer
geroff
ir
mswher
ether
eisasuccessi
vef
unct
ionall
i
nk
bet
weent
hei
rpr
oduct
s,t
hati
s,t
heout
putofaf
ir
misi
nputf
ort
heout
putofanot
her
f
ir
m athi
gherst
ageofpr
oduct
[Link]
emaybesuchi
ntegr
ati
onbet
weenapr
oduci
ng
andamar
ket
ingf
ir
mfort
hesamecommodi
tyorcommodi
ti
es;
and

3)A congl
( omer
atei
ntegr
ati
onormer
geroff
ir
mswhi
char
epr
oduci
ngal
toget
her
di
ff
erentpr
oduct
s,i
.e.
,whi
char
enotsubst
it
utesf
oreachot
her(
zer
ocr
ossel
ast
ici
tyof
demandandsuppl
y)suchasmer
gingofacl
othmaki
ngf
ir
m andadr
ugmanuf
act
uri
ng
[Link] amal
gamat
ed f
ir
m i
nthi
s si
tuat
ion wi
l
lbe a mar
ket
-di
ver
sif
ied f
ir
m.
Di
ver
sif
icat
ioni
sal
soi
mpl
i
edi
nthesi
tuat
ionofv
ert
ical
mer
ger
.

Thet
erms'
di
ver
sif
icat
ion'
,'
ver
ti
cali
ntegr
ati
on'
and'
mer
ger
'hav
ebeendef
inedabov
ein
br
ief
.Wehav
etoexami
nenow t
hemot
ivesbehi
ndt
[Link]
iondeal
swi
th
t
his.

6.
[Link]
ivesf
orDi
ver
sif
icat
ion,
Ver
ti
calI
ntegr
ati
onandMer
ger

I
.Di
ver
sif
icat
ion

Mot
ivesf
ordi
ver
sif
icat
iondependoni
tst
ypes.I
twi
l
lbet
husconv
eni
entf
orust
o
exami
net
hemot
ivesf
ordi
ff
erentt
ypesofdi
ver
sif
icat
ionandt
hensy
nthesi
zet
hem
t
oget
her
.Thet
ypesofdi
ver
sif
icat
ionasobser
vedi
npr
ac¬t
iceandmot
ivesf
ort
hem ar
e
t
hef
oll
owi
ng:

4
[Link]
eralDi
ver
sif
icat
ion:Whenaf
ir
m pr
oducesdi
ff
erentgoodswhi
chdi
ver
gef
rom t
he
samepr
ocessorsour
ceorwhi
char
eusedasmat
eri
alsf
ort
hesamepr
ocessormar
ket
.
Forexampl
e,al
eat
hert
anni
ngf
ir
m wi
l
lhav
elat
eraldi
ver
sif
icat
ionwheni
tst
art
smaki
ng
boot
sandshoesl
eat
hergar
¬ment
sandsui
tcasesi
tsel
f,becauseal
lsuchbusi
nesses
di
ver
ge f
rom l
eat
hert
anni
ng busi
[Link]
mil
arl
y,a meatsel
l
erwi
l
lhav
elat
eral
di
ver
sif
icat
ion i
fitst
art
ssel
l
ing hi
des,hor
ns,bonesand ev
en r
aw wool
.A soap
manuf
act
urermayst
artmar
gar
ineandchemi
calmanuf
act
uri
ngi
tsel
fwhi
char
eusedi
n
soapmaki
ngandt
husi
ndul
gei
nlat
eral
div
ersi
fi
cat
ion.

Reasonsf
orl
ater
aldi
ver
sif
icat
ion

Af
ir
m mayr
esor
ttol
ater
aldi
ver
sif
icat
ionbecauseoft
hef
oll
owi
ngr
easons:

 Whenpr
oduct
ionofonecommodi
tynecessar
il
yinv
olv
espr
oduct
ionofanot
her
,
say
,inby
-pr
oduct
sfor
m,t
her
ewoul
dbeanat
uralscopef
orl
ater
aldi
ver
sif
icat
ion
i
nor
dert
oav
oidwast
agesandgai
nadv
ant
agesf
rom t
hebusi
[Link]
oduct
ionof
mut
tonandwool
,bi
tumen,l
ubr
icant
s,par
aff
in,r
aw chemi
cal
s,et
c.,t
oget
herwi
th
pet
ro¬l
eum r
efi
ning,
coal
,coke,
andt
hei
rby
-pr
oduct
ssuchasbenzene,
etc.
,i
sfew
exampl
esoft
hissi
tuat
ion.
ketde
 Whenmar mandf
ort
heexi
sti
ngpr
oduct
sisdecl
i
ningorst
ag¬nant
,af
ir
m
hast
odi
ver
sif
yit
sbusi
nessl
ater
all
yinor
dert
omai
n¬t
aini
tsear
ningsort
o
i
ncr
easei
t.
 Bet
terut
il
izat
ionofexi
sti
ngf
aci
l
iti
essuchasmanager
ialt
alent
s,R&Dact
ivi
ti
es
andcer
tai
ncat
egor
iesofmachi
nes,et
c.,maybel
ook¬edasamot
ivef
orl
ater
al
di
ver
sif
icat
ion.
 Themar
ketcompl
ement
ari
tyori
nter
locki
ngpat
ter
ninseasonaldemandsal
so
l
eadst
olat
eraldi
ver
sif
icat
ionsay
,forexampl
e,onemaypr
oducecol
our
sand
wat
erspr
ayer
stoget
herf
orf
est
ival
[Link]
sty
pe ofdi
ver
sif
icat
ion when done
t
hr gerbr
oughmer ingsmor
emar
ketpowerbyr
educi
ngcompet
it
ionandt
hrough
ext
ensi
onofoper
ati
onsi
ndi
ff
erenti
ndust
ri
es.
 Tomai
ntai
nther
ateofgr
owt
h,wi
thoutbei
ngaccusedofmono¬pol
i
[Link]
sty
pe
ofdi
ver
sif
icat
ioni
sver
ymuchsui
tabl
eandact
ual
l
ybei
ngf
oll
owedal
lov
ert
he

5
 wor
ld.
 Lat
eraldi
ver
sif
icat
i s an ef
on i fect
ive bar
ri
ert
o ent
ryt
oreduce pot
ent
ial
compet
it
ion.

[Link]
omer
ateDi
ver
sif
icat
ion:I
nthi
sty
peofdi
ver
sif
icat
ion,
thepr
oduct
sneednott
o
hav
edi
ver
gedf
rom t
hesamepr
oductorsour
ce,orconv
ergeatt
hesamepr
ocessor
mar
ketasi
sthesi
tuat
ioni
nthecaseofl
ater
aldi
ver
si¬f
icat
[Link]
oduct
swi
l
lbe
qui
te unr
elat
[Link]
his st
age we can si
mpl
yexpr
ess t
hatal
lmot
ives ofl
ater
al
di
ver
sif
icat
ionwi
l
lal
sobemot
ivesofcongl
omer
atedi
ver
sif
icat
ion.
I
nbr
ief
,it
 Hel
psi
next
en¬si
onofmar
ketpoweroft
hef
ir
m
 Br
ingsst
abi
l
ityi
near
ningst
hroughcr
oss-
subsi
dizat
ion,i
.e.l
ossofonepr
oducti
s
cov
eredbyt
hegai
nfr
om ot
her
 Causesani
ncr
easei
nthebar
ri
erst
oent
ry
 Pr
ovi
desmor
eopt
ionsf
orr
iskt
aki
ngf
ort
hesakeofpr
ofi
ts
 Mai
ntai
nst
hepr
ocessofgr
owt
h
 Gi
vespecuni
arygai
nst
othef
ir
m
 Pr
ovi
desbet
terut
il
izat
ionofsomef
aci
l
iti
es,
etc.

[Link]
ti
calDi
ver
sif
icat
ion:Thi
sisv
ert
icali
ntegr
ati
oni
nfact
.Iti
nvol
vesdi
ver
sif
icat
ion
i
ntopr
ocessofmanuf
act
uri
ngordi
str
ibut
ionwhi
chpr
ecedesorsucceedst
hosei
n
whi
cht
hef
ir
misal
readyengaged.I
tcanbeei
ther'
backwar
dint
egr
ati
on'or'
for
war
d
i
ntegr
ati
on'
.

Backwar
dint
egr
ati
oni
sseenwher
eaf
ir
m st
art
smanuf
act
uri
ngpr
oduct
spr
evi
ousl
y
pur
chasedf
rom ot
her
sinor
dert
ouset
hem i
nmaki
ngi
tsor
igi
nalpr
oductl
i
[Link]
l
k
pr
oductcompanymayhavei
tsowndai
ryf
arm andsi
mil
arl
y,abaker
ymayhavei
tsown
f
lourmi
l
landsoon.

For
war
dint
egr
ati
onoccur
swhent
hef
ir
m movesnear
ert
othef
inalmar
ketf
ori
ts
pr
oductandcar
ri
esoutaf
unct
ionwhi
chwaspr
evi
ousl
yunder
takenbyi
tscust
omer
s.A
shoemak¬i
ngf
ir
m mayst
arti
tsowndi
str
ibut
ionorsel
l
ingshops,af
lourmi
l
lmayst
art
maki
ngi
tsownbaker
ies;aspi
nni
ngmi
l
lmayal
sost
artweavi
ngact
ivi
ti
esandl
i
ket
hat
-

6
ar
efewexampl
esoff
orwar
dint
egr
ati
on.

Ver
ti
caldi
ver
sif
icat
ion,whet
heri
nit
iat
edbyaf
ir
mit
sel
foroccur
ri
ngbymer
gingoft
wo
ormor
efi
rmshassev
eral
mot
ivessomeofwhi
char
easf
oll
ows:

 I
tpr
ovi
dessecur
it
ytot
hef
ir
[Link]
,af
ir
mint
egr
atesbackwar
dinor
dert
ohav
e
assur
edsour
cesofsuppl
i
[Link]
ntensi
tyofsuchi
ntegr
ati
onwi
l
lbemor
ewhen
demandcondi
ti
onsf
ort
hef
inalpr
oductoft
hef
ir
m ar
ever
ybr
ight
.Si
mil
arl
y,t
he
f
ir
mint
egr
atesordi
ver
si¬f
iesi
nfor
war
ddi
rect
ioni
nor oassur
dert emar
ketf
ori
ts
pr
oduct
.

 Ver
ti
caldi
ver
sif
icat
ionori
ntegr
ati
onpr
ovdeseconomi
i esofl
i
nkedpr
ocessesand,
t he ef
hus,t fi
ci
encyoft
he f
ir
m goes up due t
oimpr
ove¬ment
sin capaci
ty
ut
il
iz
ati
on.

 Ther lbe economi

e wi
l es i
n mar
ket
ing such as savi
ng of t
ranspor
tat
ion,
adv
ert
isement
,pr
ocur
ementandsel
l
ingcost
s.

emaybesav
 Ther ingbyel
i
minat
ing'
themi
ddl
eman'
andhi
s'un¬necessar
y'pr
ofi
t
mar
gini
nthepr
ocessofpr
oduct
ion.

 Ont
hewhol
ethef
ir
m get
smor
emar
ketpowert
hroughi
tssi
zeorabsol
utecost
adv
ant
agesorpecuni
arygai
nst
hroughv
ert
icali
ntegr
a¬t
ion.I
tgi
vesst
rengt
hto
t
hebar
ri
erst
oent
ryand,
ther
efor
e,r
educescompet
it
ioni
nthemar
ket
.

[Link]
agonalDi
ver
sif
icat
ionorI
ntegr
ati
on:I
tconsi
stsoft
hepr
ovi
sionwi
thi
nsame
or
gani
zat
ionofauxi
l
iar
ygoodsandser
vicesr
equi
redf
ort
hesev
eralmai
npr
ocessesor
l
i
nesofpr
oduct
ionoft
heor
gani
zat
[Link]
eaf
ir
m mayhav
eit
sownpower
houset
o gener
ateel
ect
ri
cit
yormachi
net
oolmaki
ng uni
tssi
ncesuch t
hingsar
e
r
equi
red f
orr
unni
ng al
mostev
ery pr
ocessi
ng act
ivi
[Link] mot
ives ofdi
agonal
di
ver
sif
icat
ionori
ntegr
ati
onwi
l
lbemor
eorl
esst
hesameasf
orl
ater
alandv
ert
ical
di
ver
sif
icat
[Link]
hem t
hemaj
oronewi
l
lbe:
 moppi
ngupofexcesscapaci
ty
 Reduct
ionoft
her
isks.

7
Themot
ivesofal
lty
pesofdi
ver
sif
icat
ioncannowbesummar
izedi
ncondensedf
orm
as:

(
i) Pr
ofi
tabi
li
ty or ear
ning mot
ive whi
ch i
mpl
i
es f
ull
er ut
il
izat
ion of
r
esour
ces/
capaci
ti
esatt
hedi
sposal
oft
hef
ir
m;
(
i) St
i abi
li
tymot
ivewhi
chi
mpl
i
esr
educt
ionofr
isksanduncer
tai
nti
est
hroughassur
ed
suppl
i
esofr
esour
cesandmar
ket
sformai
nli
neofpr
oduct
ion;
(
ii
i) Gr
owt
hmot
ivewhi
chmeansexpansi
onofpr
oduct
ivecapaci
ti
eswi
thoutbei
ng
char
gedf
orbei
ngmonopol
i
zing,
andi
nthef
aceofmar
ketl
i
mit
ati
ons;
and
(
iv) Mar
ketpowermot
ivewhi
chi
sassur
edt
hroughi
ncr
easei
nbar
ri
erst
oent
ryasa
r
esul
tofdi
ver
sif
icat
ion.

I
ngener
alanewi
, ndust
rywi
l
lhav
ehi
gherdegr
eeofdi
agonal
andv
ert
ical
int
egr
ati
onbut
amat
urei
ndust
rywi
l
lresor
ttomor
elat
eraldi
ver
sif
icat
[Link]
sisbecause,i
nthecase
ofanew i
ndust
ry,auxi
l
iar
yser
vicesmaynotbeav
ail
abl
eatal
l
,sot
hef
ir
mshav
eto
makef
ort
hei
rpr
ovi
si
onwi
thi
nit
sor
gani
zat
[Link]
urei
ndust
ryl
i
ket
ext
il
est
he
demandf
orsuchser
viceswi
l
lbel
argeenough,soi
ndependentuni
tsmaycomei
nto
exi
stencef
ort
hei
rsuppl
i
esi
nanef
fi
cientway
.

I
[Link]
ti
calI
ntegr
ati
on

Themot
ivesf
orv
ert
icali
ntegr
ati
onhav
eal
readybeendi
scussedabov
eunderv
ert
ical
di
ver
sif
icat
[Link] poi
ntwe mustmake cl
earher
e,whenev
ert
her
eisv
ert
i¬cal
i
ntegr
ati
onbet
weent
woormor
efi
rms,i
tmeansv
ert
icali
ntegr
ati
onbet
weent
hei
r
pr
oduct
[Link] i
ntegr
ati
on bet
ween pr
oduct
s exi
stsi
nthe si
tuat
ion ofv
ert
ical
di
ver
sif
icat
ionwhi
chwehav
edi
scussedear
li
[Link]
ti
onofv
ert
icali
ntegr
ati
on
bet
weent
hef
ir
msf
orv
ert
icali
ntegr
ati
oni
nthepr
oduct
smaynotnecessar
[Link]
er,
whenwet
alkofv
ert
icali
nte¬gr
ati
on,i
nreal
i
tyi
timpl
i
esi
ntegr
ati
onbet
weent
hef
ir
ms.
The i
ntegr
ati
on i
nthei
rpr
oduct
sisi
mpl
i
cit
lyobv
i e.I
ous her ncr
ease i
n pr
ofi
tsor
pr
ofi
t¬abi
l
ity ei
therbyf
ull
erut
il
izat
ion ofr
esour
ces and sav
ing ofcost
sthr
ough
backwar
d orf
orwar
dint
egr
ati
on may be l
ooked as pr
inci
palmot
ives pfv
ert
ical
i
ntegr
ati
[Link] ot
hert
wo gener
almot
ives,i
. ,st
e. abi
l
ityand gr
owt
h ar
e equal
l
y
sust
ainedt
hroughv
ert
icali
ntegr
ati
[Link]
ivesoft
hef
ir
msi
nvol
vedi
nver
ti
cal

8
i
ntegr
ati
onpl
ayi
mpor
tantr
olei
ndet
ermi
ningt
hepr
iceandquant
it
yofout
putoft
he
i
ndust
ryt
owhi
cht
heybel
ong.

I
II
.Mer
ger

As i
ndi
cat
ed ear
li
er,mer
geri
mpl
i
es di
ver
sif
icat
ion excepthor
izont
ali
nte¬gr
ati
on
bet
weent
hef
ir
[Link]
ivesofdi
ver
sif
icat
ionwi
l
lther
efor
ebeequal
l
yappl
i
cabl
eto
mer
geral
[Link]
er,
ther
ear
esomeot
heri
mpor
tantmot
ivesofmer
ger-
whi
char
enot
l
i
nkedwi
thdi
ver
sif
icat
ionaswewi
l
lseebel
owi
nthel
i
stofgener
almot
ivesf
oral
lty
pes
ofmer
ger
.

 I
ncr
easei
nPr
ofi
tabi
li
ty:Thi
smaybepossi
bleei
thert
hroughi
ncr
easeddegr
eeof
di
ver
sif
icat
ionoft
hecombi
nedf
ir
m ort
hroughot
herconsequencesofmer
ger
suchasi
ncr
easedef
fi
ciencyandmar
ketpower
.
 St
abi
li
tyi
nEar
nings:Pr
ofi
trat
esofi
ndi
vi
dualf
ir
mswhet
hert
heyar
eint
hesame
i
ndust
ryori
not
her
smayf
luct
uat
ewi
del
yast
heyar
eexposedt
oagr
eat
erdegr
ee
ofr
[Link]
heymer
get
oget
hert
her
emaybel
i
ttl
evar
iat
ioni
nthei
rcombi
ned
pr
ofi
trat
[Link]
smeanst
hegetst
abi
l
it near
yi ningsbymer
ger
.Thev
ari
abi
l
ityof
pr
ofi
trat
esi
sgener
all
ymeasur
edt
hrought
hei
rvar
ianceorst
andar
ddev
iat
[Link]
v
ari
anceofpr
ofi
trat
esoft
hecombi
nedormer
gedf
ir
mswi
l
lbel
owert
hant
he
v
ari
anceoft
hepr
ofi
trat
esf
ori
ndi
vi
dualf
ir
[Link]
mpl
esi
tuat
ionf
ort
hisi
swhen
onef
ir
mishav
ingnegat
ivepr
ofi
trat
e,t
heot
heroneposi
ti
[Link]
hmer
ge
t
oget
her
,ther
ewi
l
lbel
i
kel
yast
abl
eposi
ti
vepr
ofi
trat
efort
[Link]
siswhatwe
mayt
akeascr
oss-
subsi
dizat
ionmot
ivef
ort
hesakeofst
abi
l
ityandr
educt
ionof
r
isks.I
tmaybeemphasi
zedher
ethatar
educ¬t
ioni
nvar
iabi
l
ityofpr
ofi
trat
eisa
possi
blebutnotanecessar
yout
come,ofmer
ger
.Ther
emaybesi
tuat
ionswhen
t
her
eisani
ncr
easei
nitasi
tconsequenceofunf
oreseenbusi
nessuncer
tai
nti
es
af
termer
ger
.
 St
ockmar
ketgai
ns:f
ir
mswoul
dli
ket
omer
get
oget
heri
fther
eisadi
ff
erencei
n
t
heear
ning-
pri
cer
ati
oormar
ketpr
icef
ort
her
eshar
esi
nthest
ockmar
ket
.Ther
e
wi
l
lbemut
ual
gai
nfort
hem bymer
geri
nthi
ssi
tuat
ion.
 Ef
fi
ciencyMot
ive:Thi
smot
ivemaybest
rongeri
nthecaseofhor
i¬zont
aland

9
 ver
ti
calmer
ger
[Link]
esul
tofsuchi
ntegr
ati
ononecanexpecteconomi
esof
scal
einav
ari
ety of way
s,such as r
educt
ion i
ninv
ent
oryr
equi
rement
s,
t
ranspor
tat
ion and di
str
ibut
ion cost
s,dupl
i
cat
e R&D act
ivi
¬ti
es,cheaperr
aw
mat
eri
alsduet
oincr
easedsi
zeofpur
chases,bet
termanage¬ment
,et
c.I
nthe
caseofcongl
omer
atemer
gersucheconomi
esofscal
ear
edoubt
fulbutt
her
emay
bebet
termanagementandmor
epecuni
arygai
ns.
 Mar
ketPowerMot
ive:Thi
smaybeamaj
ormot
iveofmer
ger
,asf
ulf
il
lmentoft
he
ot
her mot
ives l
i
ke pr
ofi
tabi
l
ity
,reduct
ion i
nri
sks,gr
owt
h,et
c.,whi
ch ar
e
compl
ement
aryt
othemar
ketpowermot
ivebecomeseasi
erandal
mostcer
tai
n.
Mar
ketpoweri
sacommandov
erpr
ici
ngandout
putdeci
sionsbyt
hef
ir
m.I
t
cer
tai
nlygoesupi
nthecaseofhor
izont
almer
geraspot
ent
ialcompet
it
ioni
s
r
educed i
nthi
s si
tuat
ion t
hrough mer
ger
.Si
mil
arl
y,v
ert
icalmer
geri
n ei
ther
di
rect
ioncani
ncr
easemar
ketpower
.

Forcongl
omer
atemer
ger
sthef
oll
owi
ngf
act
orsar
ement
ionedassour
cesf
ormar
ket
power
:
 ext
endedmonopol
ypower
,
 encour
agedcr
oss-
subsi
dizat
ion,
 i easeddeeppocketadv
ncr ant
ages,
 i
ncr
easedent
rybar
ri
ers,
 i
ncr
easednon-
economi
creci
proci
tyar
range¬ment
s,
 i
ncr
easedmacr
o-concent
rat
ion,
and
 i
ncr
easedsi
zeofpowergr
oups.

 Gr
owt
hMot
ive:Thi
sisapossi
bleout
comeofmer
ger
.Af
ir
m gr
owsbyexpandi
ng
i
tsel
fint
he mar
ketorby acqui
ri
ng some exi
sti
ng f
ir
m ort
hrough mer
ger
.
Combi
nedf
ir
m af
termer
gerwi
l
lcom¬mandmor
easset
s,mor
esal
esandmor
e
mar
ketpower
.

10
6.
3Impl
icat
ionf
orPubl
icPol
ici
es

Di
ver
sif
icat
ion and i
ntegr
ati
on,whet
herv
ert
ical
,hor
izont
alorcongl
omer
ate,ar
e
i
mpor
tantmar
ketst
rat
egi
eswhi
chaf
fectt
hecompet
it
iveenv
i¬r
onmentofani
ndust
ry
andeconomyasawhol
[Link]
ir
m di
ver
sif
ies,
ithascer
tai
nwel
l
-def
inedmot
ivesf
or
t
hat
.It
sact
ionswi
l
lnotbeunnot
icedbyi
tsr
ival
[Link]
l
lal
sohav
ecount
ermov
esi
n
or
dert
omai
ntai
nthei
rmar
ketshar
espar
ti
cul
arl
ywhent
hepr
oduct
sar
ecl
osel
yrel
ated.
Thus,we expect an i
ncr
ease i
nthe compet
it
ive cl
i
mat
eint
he i
ndust
ry by
di
ver
sif
ica¬t
[Link]
ir
msaswel
last
hei
rpr
oduct
scompet
eforscar
cer
esour
cesand
mar
ket
sundersuchsi
tuat
[Link]
ionnow ar
iseswhet
hersuchcom¬pet
it
ion
i
nvol
vesal
lfi
rmsi
nthei
ndust
ryoronl
yaf
ew oft
[Link]
vat
ioni
sthat
suchcompet
it
ionwi
l
lbebet
weenl
argef
ir
msonl
[Link]
inddi
ver
sif
icat
ionawayt
o
mai
ntai
nthei
rgr
owt
handmar
ketpowerwi
th¬outbei
ngchar
gedf
ormonopol
i
zingi
nthe
mar
ket
.Butwhenonl
yfewl
argef
ir
mscont
rolt
hemar
ketandputbar
ri
erst
oent
ryf
or
new compet
it
ors,i
tleadst
oani
ncr
easei
nmar
ketconcent
rat
ionsot
hatwemaysay
t
hatdi
ver
sif
icat
ionexpl
i
cit
lyori
mpl
i
cit
lycausesmar
ketconcent
rat
[Link]
si
tuat
iont
her
eisadi
recti
mpl
i
cat
ionofdi
ver
sif
icat
ionf
orpubl
i
cpol
i
cyasnowel
far
e
st
atewi
l
lal
l
owconcent
rat
ingmar
ketf
oracommodi
tyorcommodi
ti
esi
nthehandsof
f
ewf
ir
ms.

Si
mil
arsi
tuat
ionar
isesi
nthecaseofv
ert
icalandhor
izont
ali
ntegr
ati
onamongt
he
f
ir
ms.I
tisgener
all
yagr
eedt
hatv
ert
icali
ntegr
ati
ondoeshav
ethepot
ent
ialt
oincr
ease
mar
ketpowerei
therbyr
educi
ngt
hecom¬pet
it
ionort
hrougheconomi
esofscal
[Link]
t
her
eisacount
er-
argumentf
ort
hisaccor
dingt
owhi
chv
ert
icali
ntegr
ati
ondoesnot
har
m compet
it
ion.I
nfacti
thel
psi
nincr
easi
ngcompet
it
ionbyby
passi
ngmonopol
i
sti
c
suppl
i
[Link]
eist
hus a cont
rov
ersyaboutt
he ef
fectofv
ert
icali
ntegr
ati
on on
compet
it
ionbutf
rom pol
i
cypoi
ntofv
iewt
her
eisagai
nast
rongneedt
oregul
atesuch
[Link]
izont
alandcongl
omer
atemer
ger
s,t
her
eisgr
eat
erpr
obabi
l
ityof
t
hei
rcausi
ngmar
ketconcent
rat
ion,
so,
theyar
est
ri
ctl
yregul
atedt
hrough-
publ
i
claws.A
publ
i
cpol
i
cyi
sdesi
gnedt
oachi
evesomechosenobj
ect
ivesorgoal
s.

Thesemaybe,
say
,forexampl
e:

11
(
1)Todi
ff
useeconomi
cpower
;
(
2)Tohav
eef
fi
ci
ental
l
ocat
ionofscar
cer
esour
ces;
and
(
3)Toensur
eeconomi
cfr
eedom ofmasspar
ti
cipat
ioni
ntheeconomy
.

Al
lmer
ger
sanddi
ver
sif
icat
ionpol
i
¬ci
esoft
hei
ndi
vi
dualf
ir
msi
nthemar
ketar
etobe
ev
aluat
edi
nthel
i
ghtofsuchsoci
algoal
s.I
fthepol
i
ciesar
einconf
li
ctwi
thsuchgoal
s
t
heyar
etobecheckedandcont
rol
l
edef
fect
ivel
[Link]
hegov
ernment
sappoi
nt
Ant
it
rustorMonopol
yandRest
ri
cti
veTr
adePr
act
icesCommi
ssi
onsf
ort
hispur
pose.
Ther
e wi
l
lbe a setofr
ules orgui
del
i
nes whi
ch wi
l
lbe i
mpl
e¬ment
ed bysuch
commi
ssi
ons t
oregul
ate mer
ger
s and di
ver
sif
icat
ion st
rat
egi
es oft
he f
ir
ms by
mai
ntai
ningabal
ancebet
weenpr
ivat
eandpubl
i
cint
erest
s.

12