The merger of two horizontally separated firms is more likely when there is an expectation of a positive change in market share, because the horizontally integrated firm benefits from:
Select one:
a. Economies of scale and scope.
b. The use of internal capital markets.
c. Avoiding the double marginalization problem.
d. Economizing on transaction costs.
e. Diversifying shareholder portfolios.
The correct answer and explanation is:
Correct answer: a. Economies of scale and scope.
Explanation (300 words):
A horizontal merger occurs when two firms operating at the same level in the supply chain (i.e., they produce similar products or services) combine. These firms are typically competitors in the same market. The primary motivation for such a merger often lies in the expected gain in market share, which leads to enhanced efficiency and profitability for the newly combined entity.
One of the key benefits realized from horizontal integration is economies of scale. This means that as the firm’s production volume increases, the average cost per unit of output decreases. This can result from factors such as bulk purchasing of inputs, more efficient use of resources, spreading fixed costs over a larger output, and improved technology or processes.
In addition to economies of scale, economies of scope can also arise. These occur when a firm is able to reduce costs by producing a wider variety of products together rather than separately. For example, shared marketing or distribution channels for similar products can reduce overhead and operational costs.
Together, these economies enhance the competitive position of the firm in the market, enabling it to offer products at lower prices, improve margins, and gain a larger market share. This is especially attractive in industries where fixed costs are high and product differentiation is limited.
Other choices, like internal capital markets, double marginalization, and shareholder diversification, are more relevant to vertical mergers or conglomerate mergers, not horizontal ones. Transaction cost savings can occur in vertical or horizontal mergers but are not the primary driver in horizontal cases.
Therefore, when firms merge horizontally and expect a rise in market share, it is largely because they are aiming to take advantage of economies of scale and scope, making option (a) the correct answer.