Definition
A horizontal combination occurs when two or more companies that are engaged in similar business activities or that operate in the same industry merge. These companies often produce the same product or service and are usually direct competitors. The primary objective of such combinations is to achieve economies of scale, reduce competition, and increase market share.
Examples
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Facebook and Instagram: In 2012, Facebook acquired Instagram, a direct competitor in the social media industry. This merger allowed Facebook to consolidate its market position and access Instagram’s user base.
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Disney and 21st Century Fox: Disney’s acquisition of 21st Century Fox in 2019 is another example of a horizontal combination. Both companies operated in the entertainment industry, and the merger aimed to enhance Disney’s content offerings and streaming services.
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Exxon and Mobil: The merger of oil giants Exxon and Mobil in 1999 created ExxonMobil, one of the world’s largest oil companies. By combining resources, they aimed to achieve greater efficiency and reduce costs.
Frequently Asked Questions (FAQs)
What distinguishes a horizontal combination from a vertical combination?
A horizontal combination involves companies at the same production stage within an industry, whereas a vertical combination involves companies at different stages of production within the same industry. Horizontal mergers reduce competition, while vertical mergers aim to streamline production processes.
Why do companies pursue horizontal combinations?
Companies pursue horizontal combinations to achieve economies of scale, expand market share, gain competitive advantages, and reduce costs. It can also lead to increased pricing power and enhanced R&D capabilities.
What are the potential risks of horizontal combinations?
The risks include anti-trust issues, potential job losses due to redundancies, cultural clashes between merging entities, and reduced innovation due to monopolistic practices.
How do horizontal combinations affect consumers?
While consumers might benefit from improved products and services, there is also the risk of reduced competition leading to higher prices and less choice in the market.
What regulatory concerns are associated with horizontal combinations?
Regulatory bodies, such as the Federal Trade Commission (FTC) in the United States, closely examine horizontal combinations to prevent anti-competitive practices and maintain fair market competition.
- Horizontal Merger: The combination of two or more firms that operate in the same space, often as competitors offering the same good or service.
- Economies of Scale: Cost advantages reaped by companies when production becomes efficient, as costs can be spread over a greater number of goods.
- Market Share: The portion of a market controlled by a particular company or product.
- Anti-Trust Legislation: Laws designed to promote competition and prevent monopolies.
Online References
Suggested Books for Further Studies
- “Mergers, Acquisitions, and Other Restructuring Activities” by Donald DePamphilis: This book provides a comprehensive overview of the strategic, financial, and legal aspects of corporate mergers.
- “Competition Law and Policy in the EU and UK” by Barry Rodger and Angus MacCulloch: This text discusses competition law frameworks within which horizontal and other types of mergers are regulated.
Fundamentals of Horizontal Combination: Business Strategy Basics Quiz
### Which of the following is a key characteristic of a horizontal combination?
- [ ] Merging companies are at different production stages.
- [x] Merging companies operate in the same industry.
- [ ] Merging companies have different end customers.
- [ ] Merging companies are always international.
> **Explanation:** A horizontal combination occurs when companies operating in the same industry, often as direct competitors, merge to form a larger entity.
### What is a common goal of companies engaging in horizontal combinations?
- [x] Achieving economies of scale
- [ ] Diversifying product lines
- [ ] Reducing production quality
- [ ] Increasing staffing levels
> **Explanation:** Companies engage in horizontal combinations primarily to achieve economies of scale, reduce costs, and enhance market share.
### How can a horizontal combination impact competition?
- [ ] It often increases competition.
- [x] It reduces competition.
- [ ] It has no effect on competition.
- [ ] It increases competition abroad.
> **Explanation:** Horizontal combinations often reduce competition by merging companies that were previously competitors, consolidating market share.
### Horizontal combinations can potentially face scrutiny from which type of regulatory body?
- [ ] Educational institutions
- [ ] Environmental agencies
- [x] Anti-trust authorities
- [ ] Local governments
> **Explanation:** Anti-trust authorities like the Federal Trade Commission (FTC) scrutinize horizontal combinations to ensure they do not create monopolies or anti-competitive practices.
### A significant outcome of successful horizontal combinations is often:
- [ ] Reduced market share
- [ ] Increased product diversity
- [x] Economies of scale
- [ ] Higher employment levels
> **Explanation:** Successful horizontal combinations often result in economies of scale, allowing the merged entity to reduce costs and operate more efficiently.
### Why might consumers be wary of horizontal combinations?
- [ ] They often result in higher innovation rates.
- [ ] They decrease regulatory oversight.
- [x] They may lead to higher prices and less market choice.
- [ ] They always result in better product quality.
> **Explanation:** Consumers might be wary because horizontal combinations can reduce competition, potentially leading to higher prices and fewer choices in the market.
### Which horizontal combination is a famous example in the oil industry?
- [x] ExxonMobil
- [ ] Google and YouTube
- [ ] Procter & Gamble
- [ ] Apple and Beats
> **Explanation:** The merger of Exxon and Mobil to form ExxonMobil is a well-known example of a horizontal combination in the oil industry.
### Horizontal combinations are primarily focused on which aspect?
- [ ] Vertical integration
- [ ] Product development diversification
- [ ] Entry into new markets
- [x] Expanding market share within the same industry
> **Explanation:** Horizontal combinations are mainly focused on increasing market share within the same industry by merging with direct competitors.
### What type of merger involves companies at different production stages?
- [ ] Conglomerate merger
- [x] Vertical merger
- [ ] Horizontal merger
- [ ] Market extension merger
> **Explanation:** A vertical merger involves companies at different production stages, whereas a horizontal merger involves companies at the same production stage.
### The risk of anti-competitive practices increases with which type of combination?
- [ ] Conglomerate combination
- [ ] Vertical combination
- [x] Horizontal combination
- [ ] Market-entry combination
> **Explanation:** The risk of anti-competitive practices is higher with horizontal combinations since they reduce the number of competitors within the same industry.
Thank you for exploring the concept of horizontal combinations with us! Keep enhancing your business strategy knowledge!
