5Chapter

• A merger is a transaction

that results in the transfer of

ownership and control of a corporation.

• If it is done voluntary - a ‘merger’

• If it is forced - a ‘takeover’

Economists distinguish between three types of mergers:

• Horizontal

• Vertical

• Conglomerate

• Horizontal mergers are defined as those in which rivals in the same market merge.

• Not all horizontal mergers harm competition. However, the potential to harm is clear since the result is to reduce the number of rivals.

Vertical mergers are those between two firms with actual or potential buyer-seller relationships

• A product extension merger occurs when firms merge who sell non-competing products but use related marketing channels or production processes.

Market extension merger is the joining of two firms selling the same product but in separate geographic markets.

• An actual competitor has existing productive and distributive facilities that could easily and economically be used to produce and sell the relevant product within one year in response to a small but significant increase in price.

• Potential competitor must construct significant new productive or distributive facilities in order to produce and sell the relevant product

8Chapter

The essence of free enterprise is that individual agents are allowed to make their own decisions:

• Consumers

• Firms

• Government’s decisions affect both the welfare of agents and how they behave (E.g. the income tax rate)

• Regulation is a state imposed limitation on the discretion that may be exercised by individuals or organizations, which is supported by the threat of sanction

• Regulation is the use of the power to coerce for the purpose of restricting the decisions of economic agents (the minimum wage restricts the wages that firms can pay their laborers)

• Economic regulation refers to the government-imposed restrictions on the firms decisions over price, quantity, and exit and entry conditions.

• It is aimed on achievement of allocative and productive efficiency

Instruments of Economic Regulation

• Control of price

• Control of quantity

• Control of entry and exit (the number of firms)

• Control of other variables (product quality and investment)

Control of price

• Price regulation may specify a particular price that firms must charge or may restrict firms to setting price in some range.

• Price ceilings

• Price floors

• E.g. price ranges in Kazakhtelecom on long-distance calls

Control of quantity

• Restriction on the quantity of a product or service that is sold may be used either with or without price regulation.

• E.g. Oil-producing states can place maximum production limits on oil producers.

• Alternatively, a common form of quantity regulation is that it meets all demand at the regulated price (E.g. regulating electric utilities)

Control of entry and exit

• Regulators try to control the number of firms in the industry.

Entry regulation:

• entry by new firms may be controlled (public utilities)

• entry by existing regulated firms.

• Exit is forbidden without government permission.