Horizontal Integration

1. Horizontal Integration • Benefits • Market power (fewer competitors) • Bargaining power • Scale economies • Bundling benefits from a full line of offerings

2. Monopolist Market price P* = 2+c Demand: p=4-q+c =4 c q* = 2 Quantity

3. Duopoly =1.77 =1.77 Market price Total=3.54 P* = 1.33+c   c Quantity q* =2.66

4. Three firms =1 =1 =1 Market price Total=3 P* = 1+c    Quantity q* = 3

5. 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

6. Bargaining power Not a good situation Concentrated suppliers Concentrated buyers Not consolidated industry Much better Highly concentrated Industry (one firm) Concentrated suppliers Concentrated buyers

7. 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

8. Scale economies • However, scale economies are not inexhaustible cost MES quantity

9. 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’)

10. Summary • Horizontal Integration works because • Market power (fewer competitors) • Higher bargaining power • Greater scale economies • Bundling benefits from a full line of offerings