Two banks merge. What type of merger is this?

horizontal. Same industry, same stage of production.

A furniture maker takes over a chain of furniture shops. This is

a forward vertical merger. It moves forwards, towards the customer.

A shoe company merges with an airline. This is

conglomerate. The two industries are unrelated.

Which is the main advantage of a conglomerate merger?

spreading risk across different markets. A fall in one market can be offset by the other.

Why might a horizontal merger harm consumers?

There is one competitor fewer, so prices may rise. Less competition gives the merged firm more power over price.

Mergers · Cambridge IGCSE Economics 0455 revision

In plain words

The quickest way for a firm to grow is to join with another one. When two firms agree to become one, that is a merger. When one buys the other, it is a takeover. The effects are the same.

What matters is how the two firms were related before they joined.

5 things to know

A horizontal merger joins firms in the same industry at the same stage of production: two supermarkets, or two airlines.
A vertical merger joins firms in the same industry at different stages. Backwards is towards the supplier (a car maker buying a tyre maker). Forwards is towards the customer (a brewer buying bars).
A conglomerate merger joins firms in unrelated industries: a food company buying a film studio.
Horizontal: gains economies of scale and market share, and removes a competitor. Vertical: secures supplies or outlets and gives control over cost and quality. Conglomerate: spreads risk.
Disadvantages: the larger firm may suffer diseconomies of scale, jobs may be lost where the two firms overlap, and with less competition consumers may face higher prices.

Tips and tricks

To identify a merger, ask two questions: same industry? same stage? Yes and yes is horizontal. Yes and no is vertical. No is conglomerate.
For vertical mergers, picture the chain from raw material to customer. Backwards goes towards the raw material.

5 questions, about 2 minutes.

It lands in your notebook with its questions as flashcards.

Mergers: 5 questions and answers

These are the quiz’s questions. Do the quiz first, then come back here for the ones that got you.

Two banks merge. What type of merger is this?
- horizontal (the answer)
- backward vertical
- forward vertical
- conglomerate
Same industry, same stage of production.
A furniture maker takes over a chain of furniture shops. This is
- a horizontal merger
- a backward vertical merger
- a forward vertical merger (the answer)
- a conglomerate merger
It moves forwards, towards the customer.
A shoe company merges with an airline. This is
- horizontal
- vertical
- conglomerate (the answer)
- internal growth
The two industries are unrelated.
Which is the main advantage of a conglomerate merger?
- securing supplies of raw materials
- spreading risk across different markets (the answer)
- removing a direct competitor
- gaining outlets for its products
A fall in one market can be offset by the other.
Why might a horizontal merger harm consumers?
- It creates more competition.
- There is one competitor fewer, so prices may rise. (the answer)
- It lowers the firm's market share.
- It increases consumer choice.
Less competition gives the merged firm more power over price.

5 questions

Tap an answer and you’ll see straight away whether it’s right, and why.

Worksheet

3 questions, 8 marks. Write your answers on paper, then check them.

Mergers

Cambridge IGCSE Economics 0455 · 8 marks · papermunch.org

Name ______________________________ Date ______________

Define a horizontal merger.[2]
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A merger between two firms in the same industry at the same stage of production.
I got this one
A chocolate manufacturer merges with a cocoa plantation. Identify the type of merger and explain one advantage to the manufacturer.[3]
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It is a backward vertical merger. The manufacturer secures its supply of cocoa and gains control over its cost and quality.
I got this one
Explain why a conglomerate merger reduces risk.[3]
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The firm now sells in two unrelated markets. If demand falls in one, it still has revenue and profit from the other.
I got this one

Answers: Mergers

1. A merger between two firms in the same industry at the same stage of production.
2. It is a backward vertical merger. The manufacturer secures its supply of cocoa and gains control over its cost and quality.
3. The firm now sells in two unrelated markets. If demand falls in one, it still has revenue and profit from the other.