Horizontal, Vertical, and Conglomerate Mergers

  • Victor J. Tremblay
  • Carol Horton Tremblay
Part of the Springer Texts in Business and Economics book series (STBE)


The immediate and most dramatic way for a company to expand its size and influence market structure is to purchase another company. Historical examples abound. In the late 1800s, Standard Oil Company gained a 90% share of the petroleum market by purchasing more than 120 competitors. In the 1960s, ITT (International Telephone and Telegraph) became a diversified corporation by acquiring 52 domestic and 55 foreign companies, including such well-known businesses as Avis Rent-a-Car, Continental Baking (Wonder Bread), Hartford Insurance, and Sheraton Hotels. By 1968, ITT had become the 11th largest corporation in the USA. The recent financial crisis has forced a number of very large acquisitions. The largest of these occurred in 2008, with Bank of America purchasing Merrill Lynch, a provider of insurance and financial services, for $50 billion and Wells Fargo Bank purchasing Wachovia Bank for $15.1 billion.


Market Power Chief Executive Officer Consumer Surplus Vertical Integration Total Surplus 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


  1. Alchian AA, Demsetz H (1972) Production, information costs, and economic organziation. Am Econ Rev 62:777–795Google Scholar
  2. Andrade G, Mitchell M, Stafford E (2001) New evidence and perspectives on mergers. J Econ Perspect 15(2):103–120CrossRefGoogle Scholar
  3. Ashenfelter O, Hosken D (2008) The effect of mergers on consumer prices: evidence from five selected case studies. National Bureau of Economic Research, Working Paper 13859, March 2008Google Scholar
  4. Barberis N, Thaler R (2003) A survey of behavioral finance. In: Constantinides GM, Harris M, Stulz R (eds) Handbook of the economics of finance. ElsevierGoogle Scholar
  5. Barton DM, Sherman R (1984) The price and profit effects of horizontal merger: a case study. J Ind Econ 33:165–177CrossRefGoogle Scholar
  6. Blair RD, Kaserman DL (1983) Law and economics of vertical integration and control. Academic, New YorkGoogle Scholar
  7. Bogan V, Just D (2009) What drives merger decision making behavior? Don’t seek, don’t find, and don’t change your mind. J Econ Behav Organ 72(3):930–943CrossRefGoogle Scholar
  8. Bork RH (1978) The antitrust paradox: a policy at war with itself. Basic Books, New YorkGoogle Scholar
  9. Carlton DW, Perloff JM (2005) Modern industrial organization. Person, Addison, Wesley, BostonGoogle Scholar
  10. Caves RE (1981) Diversification and seller concentration: evidence from changes, 1963–1972. Rev Econ Stat 63(2):289–293CrossRefGoogle Scholar
  11. Caves RE (1989) Mergers, takeovers, and economic efficiency: foresight and hindsight. Int J Ind Organ 7(1):151–173CrossRefGoogle Scholar
  12. Caves RE, Murphy WF (1976) Franchising: firms, markets, and intangible assets. Southern Econ J 42:572–586CrossRefGoogle Scholar
  13. Chaloupka FJ (2007) Cigarettes: old firms facing new challenges. In: Tremblay VJ, Tremblay CH (eds) Industry and firm studies. M.E. Sharpe, Amonk, NY, pp 80–118Google Scholar
  14. Coase R (1937) The nature of the firm. Economica 4:386–405CrossRefGoogle Scholar
  15. Comanor WS (1985) Vertical price-fixing, vertical market restrictions, and the new antitrust policy. Harv Law Rev 98(5):983–1002CrossRefGoogle Scholar
  16. Comanor WS, Frech HE III (1985) The competitive effects of vertical agreements. Am Econ Rev 75:539–546Google Scholar
  17. Creane A, Davidson C (2004) Multidivisional firms, internal competition and the merger paradox. Can J Econ 37(4):951–977CrossRefGoogle Scholar
  18. Dafny L (2009) Estimation and identification of merger effects: an application to hospital mergers. J Law Econ 52:523–550CrossRefGoogle Scholar
  19. De Long Bradford J, Shleifer A, Summers LH, Waldman RJ (1990) Noise trader risk in financial markets. J Pol Econ 98:703–738CrossRefGoogle Scholar
  20. De Long JB, Shleifer A, Summers LH, Waldman RJ (1991) The survival of noise traders in financial markets. J Bus 64(1):1–19CrossRefGoogle Scholar
  21. Edwards CD (1955) Conglomerate bigness as a source of power. In: Business Concentration and Price Policy. Princeton University PressGoogle Scholar
  22. Egger P, Hahn FR (2010) Endogenous bank mergers and their impact on banking performance: some evidence from Austria. Int J Ind Organ 28(2):155–166CrossRefGoogle Scholar
  23. Eisenhardt K (1989) Agency theory: an assessment and review. Acad Manage Rev 14(1):57–74Google Scholar
  24. Eis C (1969) The 191901930 Merger movement in American industry. J Law Econ 12:280–284CrossRefGoogle Scholar
  25. Elzinga KG (1990) The beer industry. In: Adams W (ed) The structure of American industry. MacMillan Publishing Co., New YorkGoogle Scholar
  26. Färe R, Grosskopf S, Knox Lovell CA (1985) The measurement of efficiency of production. Springer, New YorkGoogle Scholar
  27. Färe R, Grosskopf S, Knox Lovell CA (2008) Production frontiers. Cambridge University Press, Cambridge, EnglandGoogle Scholar
  28. Fee CE, Thomas S (2004) Sources of gains in horizontal Mergers: evidence from customer, supplier, and rival firms. J Financial Econ 74(3):423–460CrossRefGoogle Scholar
  29. Focarelli D, Panetta F (2003) Are Mergers beneficial to consumers? Evidence from the market for bank deposits. Am Econ Rev 93(4):1152–1172CrossRefGoogle Scholar
  30. Graham JR, Lemmon ML, Wolf JG (2002) Does corporate diversification destroy value? J Finance 42(2):695–720CrossRefGoogle Scholar
  31. Greer DF (1992) Industrial organization and public policy. MacMillan, New YorkGoogle Scholar
  32. Grossman SJ, Hart O (1986) The costs and benefits of ownership: a theory of vertical and lateral integration. J Polit Econ 94(4):691–719CrossRefGoogle Scholar
  33. Gugler K, Mueller DC, Burcin Yurtoglu B, Zulehner C (2003) The effects of Mergers: an international comparison. Int J Ind Organ 21(5):625–653CrossRefGoogle Scholar
  34. Gugler K, Siebert R (2007) Market power versus efficiency effects of Mergers and research joint ventures: evidence from the semiconductor industry. Rev Econ Stat 89(4):645–659CrossRefGoogle Scholar
  35. Hamilton J (1997) Brighter days for Clorox. Business Week, June 16, 1997, 62 and 65Google Scholar
  36. Hart O, Moore J (1990) Property rights and the nature of the firm. J Polit Econ 98(6):1119–1158CrossRefGoogle Scholar
  37. Harris R, Robinson C (2002) The effect of foreign acquisitions on total factor productivity: plant-level evidence from U.K. manufacturing, 1987–1992. Rev Econ Stat 84(3):562–568CrossRefGoogle Scholar
  38. Hastings JS (2004) Vertical relationships and competition in retail gasoline markets: empirical evidence from contract changes in Southern California. Am Econ Rev 94(1):317–328CrossRefGoogle Scholar
  39. Hortacsu A, Syverson C (2007) Cementing relationships: vertical integration, foreclosure, productivity, and prices. J Polit Econ 115(2):250–301CrossRefGoogle Scholar
  40. Iwasaki N, Tremblay VJ (2009) The effect of marketing regulations on efficiency: LeChatelier versus coordination effects. J Prod Anal 32(1):41–54CrossRefGoogle Scholar
  41. Jandik T, Makhija AK (2005) Can diversification create value? Evidence from the electric utility industry. Fin Manag 34(1):61–93CrossRefGoogle Scholar
  42. Jans I, Rosenbaum DI (1997) Multimarket contact and pricing: evidence from the U.S. cement industry. Int J Ind Organ 15(3):391–412CrossRefGoogle Scholar
  43. Kim EH, Singal V (1993) Mergers and market power: evidence from the airline industry. Am Econ Rev 83(3):549–569Google Scholar
  44. Klein B (1988) Vertical integration as organizational ownership: the fisher body – General motors relationship revisited. J Law Econ Organ 4:199–213Google Scholar
  45. Klein B, Crawford R, Alchian A (1978) Vertical integration, appropriable rents, and the competitive contracting process. J Law Econ 21:297–326CrossRefGoogle Scholar
  46. Kwoka JE Jr., M Pollitt (2010) Industry restructuring, mergers, and efficiency: evidence from electric power. Int J Ind Organ, forthcoming, 2010Google Scholar
  47. Lafontaine F, Slade M (2007) Vertical integration and firm boundaries: the evidence. J Econ Lit 45:629–685CrossRefGoogle Scholar
  48. Langlois RN, Robertson PL (1989) Explaining vertical integration: lessons from the American automobile industry. J Econ Hist 49(2):361–375CrossRefGoogle Scholar
  49. Lappen AA (1988) Battling for a bleachhead. Forbes, November 28, 1988, 138Google Scholar
  50. Levine JB (1988) Clorox makes a daring move in the laundry room. Business Week, May 2, 1988, 36Google Scholar
  51. Lichtenberg FR (1992) Corporate takeovers and productivity. MIT Press, Cambridge, MAGoogle Scholar
  52. Lichtenberg FR, Siegel D (1987) Productivity and changes in ownership of manufacturing plants. Brookings Pap Econ Act 3:643–683CrossRefGoogle Scholar
  53. Malmendier U, Tate G (2008) Who makes acquisitions? CEO overconfidence and market reaction. J Fin Econ 89:20–43CrossRefGoogle Scholar
  54. Manne HG (1965) Mergers and the market for corporate control. J Polit Econ 73:110–120CrossRefGoogle Scholar
  55. Marris R (1964) The economic theory of managerial capitalism. The Free Press, Glencoe, ILGoogle Scholar
  56. Marshall WJ, Yawitz JB, Greenberg E (1984) Incentives for diversification and the structure of conglomerate firms. Southern Econ J 51(1):1–23CrossRefGoogle Scholar
  57. Martin JD, Sayrak A (2003) Corporate diversification and shareholder value: a survey of recent literature. J Corp Fin 9(1):37–57CrossRefGoogle Scholar
  58. Martin S (2007a) Mergers: an overview. Working paper. Department of Economics, Purdue University, IN, USAGoogle Scholar
  59. Martin S (2007b) Remembrance of things past: antitrust, ideology, and the development of industrial economics. In: Stennek J (ed) The political economy of antitrust. Emerald Group Publishing Limited, England, pp 25–57CrossRefGoogle Scholar
  60. May DO (1995) Do managerial motives influence firm risk reduction strategies? J Fin 50(4):1291–1309CrossRefGoogle Scholar
  61. McAfee RP, Williams MA (1988) Can event studies detect anticompetitive mergers? Econ Lett 28:199–203CrossRefGoogle Scholar
  62. Mcguckin RH, Nguyen SV (1995) On productivity and plant ownership change: new evidence from the longitudinal research database. Rand J Econ 26(2):257–276CrossRefGoogle Scholar
  63. Monteverde K, Teece DJ (1982) Appropriable rents and quasi-vertical integration. J Law Econ 25:403–418CrossRefGoogle Scholar
  64. Montgomery CA (1994) Corporate diversification. J Econ Perspect 8(3):163–178CrossRefGoogle Scholar
  65. Mortimer JH (2007) Vertical contracts in the video rental industry. Rev Econ Stud 75(1):165–199Google Scholar
  66. Mueller DC (1969) A theory of conglomerate mergers. Quart J Econ 83(4):643–659CrossRefGoogle Scholar
  67. Mueller DC (2006) Corporate governance and economic performance. Int Rev Appl Econ 20(5):623–643CrossRefGoogle Scholar
  68. Newton LH (2006) Permission to steal: revealing the roots of corporate scandal, Blackwell PublishingGoogle Scholar
  69. Ordover JA, Saloner G, Salop SC (1990) Equilibrium vertical foreclosure. Am Econ Rev 80(1):127–142Google Scholar
  70. Overstreet TR, Price R (1983) Maintenance: economic theories and empirical evidence. FTC Bureau of Economics Staff Report, Washington D.C., November 1983Google Scholar
  71. Prager RA, Hannan TH (1998) Do substantial horizontal mergers generate significant price effects? Evidence from the banking industry. J Ind Econ 46(4):433–452CrossRefGoogle Scholar
  72. Ravenscraft DJ, Scherer FM (1987) Mergers, sell-offs, and economic efficiency. Brookings Institution, Washington DCGoogle Scholar
  73. Rees R (1985a) The theory of principle and agent, Part I. Bull Econ Res 37(1):3–26CrossRefGoogle Scholar
  74. Rees R (1985b) The theory of principle and agent, Part II. Bull Econ Res 37(2):75–97CrossRefGoogle Scholar
  75. Riordan MH (1998) Anticompetitive vertical integration by a dominant firm. Am Econ Rev 88:1232–1248Google Scholar
  76. Rubin PH (1978) The theory of the firm and the structure of the franchise contract. J Law Econ 21:223–233CrossRefGoogle Scholar
  77. Salant SW, Switzer S, Reynolds RJ (1983) Losses from horizontal Merger: the effects of an exogenous change in industry structure on Cournot-Nash equilibrium. Quart J Econ 98(2):185–213CrossRefGoogle Scholar
  78. Salinger MA (1988) Vertical mergers and market foreclosure. Quart J Econ 103:345–356CrossRefGoogle Scholar
  79. Sass TR (2005) The competitive effects of exclusive dealing: evidence from the U.S. beer industry. Int J Ind Organ 23:203–225CrossRefGoogle Scholar
  80. Scherer FM, Ross D (1990) Industrial market structure and economic performance. Houghton Mifflin Co., BostonGoogle Scholar
  81. Schmalensee R (1973) A note on the theory of vertical integration. J Polit Econ 81(2):442–449CrossRefGoogle Scholar
  82. Shao M (1991) A bright idea that clorox wishes it never had. Business Week, June 24, 1991, 118–119Google Scholar
  83. Sherman R (1974) The economics of industry. Little Brown, BostonGoogle Scholar
  84. Shleifer A, Vishny RW (1989) Management entrenchment: the case of manager-specific investments. J Fin Econ 25:123–139CrossRefGoogle Scholar
  85. Shleifer A, Vishny RW (1997) A survey of corporate governance. J Fin 52(2):737–783CrossRefGoogle Scholar
  86. Smith A (1776) An inquiry into the nature and causes of the wealth of nationsGoogle Scholar
  87. Spengler JJ (1950) Vertical integration and antitrust policy. J Polit Econ 58:347–352CrossRefGoogle Scholar
  88. Stigler GJ (1950) Monopoly and oligopoly by merger. Am Econ Rev 40(2):23–34Google Scholar
  89. Thomas CJ, Willig RD (2006) The risk of contagion from multimarket contact. Int J Ind Organ 24(6):1157–1184CrossRefGoogle Scholar
  90. Thomas RP (1977) An analysis of the pattern of growth of the automobile industry, 1895–1929. Arno Press, New YorkGoogle Scholar
  91. Tremblay VJ, Tremblay CH (2005) The U.S. brewing industry: data and economic analysis. MIT Press, CambridgeGoogle Scholar
  92. Varian HR (2010) Intermediate microeconomics: a modern approach. W.W. Norton, New YorkGoogle Scholar
  93. Vernon JM, Graham DA (1971) Profitability of monopolization by vertical integration. J Polit Econ 79(5):924–925CrossRefGoogle Scholar
  94. Villalonga B (2004) Does diversification cause the ‘diversity discount’? Fin Manag 33(2):5–27Google Scholar
  95. Waldman DE (1986) The economics of antitrust: cases and analysis. Little, Brown, and Company, BostonGoogle Scholar
  96. Waldman DE, Jensen EJ (2006) Industrial organization: theory and practice. Person Addison-Wesley, BostonGoogle Scholar
  97. Whinston MD (2007) Antitrust policy toward horizontal mergers. In: Armstrong M, Porter RH (eds) Handbook of industrial organization, vol 3. Elsevier North-Holland, Boston, pp 2369–2440CrossRefGoogle Scholar
  98. Williamson OE (1968) Economies as an antitrust defense: the welfare trade-offs. Am Econ Rev 58(1):18–36Google Scholar
  99. Williamson OE (1975) Markets and heirachies: analysis and antitrust implications: a study in the economics of internal organization. The Free Press, New YorkGoogle Scholar
  100. Williamson OE (1985) The economic institutions of capitalism: firms, markets, and relational contracting. The Free Press, New YorkGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC 2012

Authors and Affiliations

  • Victor J. Tremblay
    • 1
  • Carol Horton Tremblay
    • 1
  1. 1.Department of EconomicsOregon State UniversityCorvallisUSA

Personalised recommendations