Firms: Types, Mergers & Scale
Microeconomic Decision Makers · 3 question types
Exam Frequency Analysis
Past paper frequency (2018 to 2024)
This topic accounts for approximately 5% of your exam marks.
New emphasis in the 2027 syllabus; types of firms, the definitions of horizontal, vertical and conglomerate mergers, and economies/diseconomies of scale are examined directly. Guidance based on specimen materials.
Two firms can join together in a merger, which makes the combined firm larger. The syllabus expects the three types of merger, with definitions.
A horizontal merger is a merger between two firms in the same industry and at the same stage of production (for example, two car manufacturers, or one supermarket chain buying another).
A vertical merger is a merger between two firms in the same industry but at different stages of production. Backward vertical means joining with a supplier earlier in the chain (a car maker buying a steel producer); forward vertical means joining with a distributor later in the chain (a car maker buying a dealership).
A conglomerate merger is a merger between two firms in completely different industries (a food company merging with an electronics firm), usually to diversify and spread risk.
| Merger type | Main advantage | Main disadvantage |
|---|---|---|
| Horizontal | Larger market share and economies of scale | May create monopoly power and reduce competition |
| Vertical (backward) | Secures and controls the supply of inputs | The firm must manage an unfamiliar stage of production |
| Vertical (forward) | Secures outlets and control over how the product is sold | The firm must run retailing it may not be skilled at |
| Conglomerate | Spreads risk across different markets | Managers may lack expertise in the new industry |
Analyse why a government may prevent a merger (6 marks)
What comes up: "Analyse why a government may prevent a horizontal merger" (6 marks).
Write: Define the merger first — a horizontal merger combines two firms in the same industry and the same stage of production (1). A government may block it if it would give the new firm monopoly power (1), letting it raise prices because consumers cannot switch to other firms (1), and reduce the number of suppliers (1), giving consumers less choice and less innovation (1).
Watch out: For the definition mark you need both "same industry" and "same stage of production" — one alone does not earn it. Then trace the chain from monopoly power to higher prices and less choice; do not stop at "it creates a monopoly".