Horizontal Merger
What is Horizontal Merger?
A horizontal merger is a combination of two firms that compete in the same market at the same stage of production, which raises concentration directly.
Because the merging firms were rivals, the deal removes a competitor and hands the survivor a larger share. Two harms follow: the merged firm may raise price on its own, since customers who would have switched to the other firm now stay inside, and the smaller number of remaining sellers makes quiet coordination easier. Against that, merging can genuinely cut costs by spreading fixed costs over more output or by combining complementary assets, which is the efficiency defense firms present to regulators. Agencies screen deals with market shares and the Herfindahl-Hirschman Index, then ask whether entry or expansion by others would defeat a price rise. A horizontal merger is not a vertical merger, which joins a buyer and a seller and leaves the count of competitors in each market unchanged.
Horizontal Merger: a worked example
An industry has four firms with shares of 40%, 30%, 20% and 10%. Its Herfindahl-Hirschman Index is 1,600 + 900 + 400 + 100 = 3,000. If the second and third firms merge, the shares become 40%, 50% and 10%, so the index becomes 1,600 + 2,500 + 100 = 4,200, a jump of 1,200. The shortcut gives the same answer without recomputing the whole thing: 2 × 30 × 20 = 1,200. Screening thresholds change over time, but a rise that large in an already concentrated market is what triggers a closer review.
The mistake students make with horizontal merger
Students assume every horizontal merger is illegal, or that any deal creating a large firm will be blocked. Most horizontal mergers clear. Agencies weigh the lost competition against real cost savings and against how easily other firms could enter or expand, and concentration numbers are a screen for deciding which deals deserve examination, not a verdict on them.
Horizontal Merger questions
How do regulators measure market concentration?
Regulators most often use the Herfindahl-Hirschman Index, calculated by squaring each firm's percentage market share and adding the results, which runs from near zero in a fragmented market up to 10,000 for a single seller. They also use simple concentration ratios, such as the combined share of the four largest firms.
What is the difference between a horizontal and a vertical merger?
A horizontal merger joins competitors in the same market, while a vertical merger joins firms at different stages of the same supply chain, such as a producer and its distributor. Only the horizontal merger reduces the number of firms competing for the same customers.
Why might a horizontal merger raise prices?
A horizontal merger can raise prices because customers who would have switched from one merging firm to the other now have nowhere cheaper to go, so a price rise costs the merged firm fewer sales than it would have cost either firm alone. Fewer remaining sellers also makes it easier for the survivors to coordinate quietly.
Formula / Example
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Related terms
Common comparisons
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