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Horizontal mergers take place between companies in the same industry. These companies are rivals who sell the same goods or services. When a merger takes place, a rival is eliminated and potential for gains become higher. A vertical merger is one in which a firm or company combines with a supplier or distributor.
For example, if a car making firm is receiving chassis from two suppliers and decides to acquire them, it is a vertical merger.
On the other hand conglomerate mergers are those between firms that are in unrelated business activities. The purpose of conglomerate merger is to diversify and reduce risk. A real world example of a horizontal merger is Chrysler and Diamler-Benz AG. Both companies were in the same industry when the merger took place. A real world example of a vertical merger is the merger between Time Warner and Turner Corporation.
Turner Corporation provided the programming to Time Warner and was a supplier. Time Warner had a large cable operation.
The real life example of a conglomerate merger is between Walt Disney Company and the American Broadcasting Company. Both firms were strategically unrelated. Horizontal mergers can lead to monopolies or unreasonable market power in the hand of one company. Similarly, vertical mergers can lead to anti-competitiveness. The US government should study the cases individually and if a merger is anti-competitive or leads to monopoly power, such mergers should be disallowed.
The reason is that these mergers are against public interests. Other mergers may be allowed.
The effect of government intervention, taxation, and regulations has a desirable effect on economic behavior. Government intervention takes place when there is necessity to support the economic fabric of the nation. For example, when the US government provided bailout packages to investment banks the objective was to rescue the banking system of the United States.
The fiscal intervention has the objectives of reducing unemployment, ensuring growth, and controlling inflation. An example is a fiscal stimulus package that reduces unemployment. The direct goal of taxation is to finance government programs, reduce government deficit, and to pay off the debts of the government. Taxation is reduced to stimulate the economy. A real-world example is that currently President Obama has announced that the effective corporate tax rate will be cut to 28% and for manufacturers the effective rate will be 25%.
The goal of this policy is to encourage businesses to invest more and become more competitive. Regulations are imposed to control unacceptable economic behavior. For example, around 2000 there were a number of large accounting scandals that shook the confidence of investors. To regain the confidence of investors, the Sarbanes Oxley Act 2002 was passed. This regulation sets higher standards for Public Company Boards, management, and public auditors. The goal of this act was to restore investor confidence in public companies. The goal was also to bring greater transparency and accountability in the management of public companies.
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