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Chapter 15: Problem 5

In 2016 , telecommunications company AT\&T reached an agreement to buy TimeWarner, which owns cable networks, magazines, and a film studio. In an interview with the Wall Street Journal, the CEOs of the two firms "played down concerns that the deal wouldn't get regulatory approval, again asserting that the deal is vertical in nature, rather than eliminating a competitor." a. What did the CEOs mean by saying that the merger was "vertical in nature"? b. Why would federal antitrust regulators be less likely to oppose a merger that was "vertical in nature" than one that eliminated a competitor? c. If the deal doesn't eliminate a competitor, what do the firms hope to gain from it?

Short Answer

Expert verified
a) The CEOs meant the merger was 'vertical in nature' because the companies are in different stages of the production cycle, thus their merger would involve the integration of these different stages, a characteristic of a vertical merger. b) Federal antitrust regulators would be less likely to oppose a 'vertical' merger than a 'horizontal' one because the former typically doesn't reduce competition in the way that a horizontal merger (between direct competitors) might. c) The firms may hope to gain cost savings, increased market power, better coordination of supply chain, increased entry barriers for competitors and better access to information from such a merger.

Step by step solution

01

Understanding 'vertical in nature'

The term 'vertical in nature' refers to vertical mergers. This is when two firms from different stages of production merge. For example, a manufacturer merging with a supplier or a retailer. In this case, AT&T, a telecommunications company, and TimeWarner, which owns cable networks, magazines and a film studio, are in different stages of content creation and distribution, making their merger vertical.
02

Why regulators may allow vertical mergers

Federal antitrust regulators are primarily concerned with maintaining competition in the marketplace, which usually results in better prices and options for consumers. If a merger is between two direct competitors (a horizontal merger), it could potentially reduce competition and lead to higher prices. This is not typically the case with vertical mergers since it's involving companies in different stages of the production process. Therefore, they are less likely to oppose a vertical merger.
03

Benefits of a vertical merger

Even without eliminating a competitor, there's much to gain from a vertical merger. These benefits could be cost saving, as controlling more of the production process can lead to lower costs. This is referred to as economies of scale. Also, this could increase market power, give better access to information, improve supply chain coordination, and increase entry barriers for other competitors. In the context of AT&T and Time Warner, possible benefits could include better control over the content creation and distribution process, and access to different markets.

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