Horizontal mergers occur when two businesses within the same industry -- and which produce the same kind of product -- join forces to reduce overhead while increasing profits. If similar businesses merge, the company expands its line of products or services and increases its power in the industry.
Economies of Scope
Economies of scope refer to the merged company's potential to cross-promote products or bundle products or services while reducing marketing costs. For instance, a horizontal merger between a phone company and an Internet service provider -- two communication businesses -- creates production efficiencies whereby the newly merged company can promote bundled services at a reduced rate. This can prove to be fierce competition for higher-costing phone and Internet providers that offer just one service.
Dominating the Market
Although criticized for being monopolistic, horizontal mergers can help companies corner a specific market. For instance, ABC's merger with the Walt Disney Company enabled ABC to cross-promote and re-air Disney Channel's cable programming on its broadcasting channel. Shows like "Hannah Montana" can air once on the Disney Channel and earn more revenue for the same parent company when rerun on ABC. Owning several cable channels enables a media company to cross-promote its offerings on all of its channels.
The greater a company's profits become from reduced overhead and cross-promotion, the more money the company can invest in research and development to help the company grow. Companies can invest in public opinion surveys and focus groups to understand how potential customers perceive their products. Companies can also hire more workers to develop new products and expand operations to increase production, meet demand and earn even more money.
Some advantages associated with horizontal mergers are potentially detrimental for consumers. Such was the case in 1997 when Staples, an office supply chain, attempted to merge with Office Depot, a rival office supply chain. The resulting company would have been the only big-box office supply retailer in many areas, which would have given the store plenty of leeway for increasing prices. The Federal Trade Commission stopped the merger to prevent a monopoly.
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