Lecture Notes on Horizontal and Vertical Integration

These flashcards cover essential concepts regarding horizontal and vertical integration, including benefits, drawbacks, and strategic reasoning behind mergers and acquisitions.

What are the main reasons a firm might pursue horizontal integration?

To create value through synergies, increase market power, prevent rivals from undermining competitive advantage, and justify the costs associated with running a larger organization.

What is meant by the term 'synergies' in the context of mergers and acquisitions?

Synergies refer to the potential benefits achieved through mergers that make combined companies more valuable than the sum of their separate parts, often through cost savings or revenue enhancement.

What are the reasons against horizontal integration?

Inefficiencies associated with larger firms, including higher agency costs, market focus loss, and inefficient internal capital allocations.

What are 'cross-sided network effects'?

Cross-sided network effects occur when the value of a service increases for one set of users as more members from another set of users join, such as more drivers attracting more riders in a ride-sharing app.

What is the consequence of too much horizontal integration?

It can destroy shareholder value by leading to inefficiencies and lack of focus, ultimately resulting in poorer financial performance.

What is the importance of market power in mergers?

Market power allows a merged company to reduce competition and increase prices by commanding more influence over suppliers and buyers.

What are vertical firm boundaries?

Vertical firm boundaries refer to decisions about whether a firm should integrate or outsource different stages of production processes, encompassing suppliers and buyers.

What constitutes a good reason for vertical integration?

Good reasons for vertical integration include reducing transaction costs, mitigating inefficiencies, and capturing market power by controlling supply chains.

What is the potential drawback of vertical integration?

Increased costs, less flexibility, and potential inefficiencies due to managing more complex operations internally.

What are 'agency costs'?

Agency costs arise from the expenses incurred to monitor and incentivize employees, especially in larger organizations to ensure alignment of goals.