In econ 101, textbooks like to say that horizontal mergers violate anti-trust laws but vertical mergers do not. Suppose Ford and GM were to merge. This is a horizontal merger. This would make the two automakers a monopoly. What if Ford would merge with the tire maker, the metal producer, the chemical makers, and the railroads. This is an example of a vertical merger--one in which all of the steps in making the finished product are aligned vertically. Why doesn't the Department of Justice frown on this type of merger? Because Ford can reduce costs by acquiring the resources it used to pay for and produce at cost. In theory, the company can now make more at a lower price.
In the music industry, I believe that this vertical merger should be investigated by the DOJ since the costs of production approach zero over large quantities. Say EMI wants to merge with Warner. It makes sense that there's less coordination problems with pricing so now it'll be easier to maintain the rigid $15 price per CD. With over 80% of the recorded music made up of EMI, Warner, UMG, and Sony/BMG, a horizontal merger should get the nose of the watchdog, DOJ, twitching.
A vertical merger might be like Wal-Mart and UMG merging. Wal-Mart carries about 2.5% of the recorded music on their shelves according to Long Tail author, Chris Anderson. A vertical merge would ensure that competitive pressures would be nonexistent in the CD market.
2 comments:
Why are any merger's frowned apon? A monopoly is only evil if it price gouges. Lets say Wal-Mart for example starts drastically raising profits. At the point that prices are equal to the prices of small businesses that had preceded wal-Mart, these businesses would start to reappear and make Wal-Mart lower prices once again to gain market share. The consumer benefits. this cycle could go on forever, but the industry and the consumer generally gain nothing, but lose nothing with a non-price gouging monopoly.
When a company horizontally buys out a market it becomes more and more like, or even a true, monopoly. When the firm becomes a monopoly they use the basic principle of maximizing profits by finding its total revenue and subtracting its total costs and producing at this point. This point is where marginal cost equals marginal revenue. One may see this as price gouging, however the monopoly, just like any other business, sees this as optimal production. This irregularity in pricing power that the monopoly has creates a larger producer surplus, lowers consumers surplus, and leaves a net loss for the economy, which is known as the deadweight loss triangle. Therefore, if you have a non-price gouging monopoly the firm isn't producing optimally and will, under economic principle, always try to maximize profits. Leaving this power open for the monopoly to take advantage of is why mergers are frowned upon. And this is why anti-trust laws are in place, or monopolies are broken to allow the free market to determine what the socially optimal output and price should be for the product.
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