Horizontal integration
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Horizontal Integration. Benefits Market power (fewer competitors) Bargaining power Scale economies Bundling benefits from a full line of offerings. Monopolist. Market price. P* = 2+c. Demand: p=4-q+c.  =4. c. q* = 2. Quantity. Duopoly.   =1.77.   =1.77. Market price.

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Horizontal integration
Horizontal Integration

  • Benefits

    • Market power (fewer competitors)

    • Bargaining power

    • Scale economies

    • Bundling benefits from a full line of offerings


Monopolist
Monopolist

Market

price

P* = 2+c

Demand:

p=4-q+c

=4

c

q* = 2

Quantity


Duopoly
Duopoly

=1.77

=1.77

Market

price

Total=3.54

P* = 1.33+c





c

Quantity

q* =2.66


Three firms
Three firms

=1

=1

=1

Market

price

Total=3

P* = 1+c







Quantity

q* = 3


Market power
Market power

  • Eliminating / buying your competitors means fewer firms

  • Fewer firms mean greater profit

Market

price

2

  • Price signaling (supports collusion)

1

Cost

# of firms


Bargaining power
Bargaining power

Not a good situation

Concentrated

suppliers

Concentrated

buyers

Not consolidated industry

Much better

Highly concentrated

Industry (one firm)

Concentrated

suppliers

Concentrated

buyers


Scale economies
Scale economies

  • By buying out your competitors you can create one very large company with much larger scale and thus lower cost structure than remaining competitors

Market

price

Small company’s costs

Large company’s costs

quantity


Scale economies1
Scale economies

  • However, scale economies are not inexhaustible

cost

MES

quantity


Bundling full line supplier
Bundling - full line supplier

  • Bundling benefits from being able to offer a full line of products

    • Customer’s administrative costs are lower

      • Only works when one customer buys many different models

    • Demand side economies of scope

    • Product integration

      • (FUD – the ‘blame game’)


Summary
Summary

  • Horizontal Integration works because

    • Market power (fewer competitors)

    • Higher bargaining power

    • Greater scale economies

    • Bundling benefits from a full line of offerings


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