Unilateral effects or non coordinated effects economics essay

Mergers and acquisitions are result in buying, selling, dividing and combining of different companies or similar entities with the probability of growing fast in the respective sector or getting reigned in the location of origin. Kerry and Headland was the close competitor and the largest supplier of FRM in UK their merger was the result of poor financial performance of Headland. Their sales volume before the merger was accounted for 40-50% of the total sales volume of FRM in UK. The sales volume will up to 50-60% of the total sales volume of FRM in UK after the Kerry and Headland merger exactly the fact enabling the two firms to utilize their mutual resources to attain maximum production (Sanford J. Grossman, 2013). Whereas the next largest supplier was the Heniz that manufactures its brand FRM and other supplier could not reach more than 10% of the ownership label FRM supply. The analysis of the two companies’ merger is constructed to find out the relationship between merger and substantial reduction in market competition on the basis of price, quantity and marginal profit of the merging firms. There are three types of mergers namely horizontal mergers that is merger between potential competitor of the similar product in similar geographic locations and at the same level of production. Second is the vertical merger that is found between firms operating at a different but complementary level of market and producing same final product e. g. Merger between automobile firm and metallic sheet manufacturer. Third is the conglomerate merger i. e. a merger between enterprises dealing in a variety of products like a merger between automobile manufacturer and fabric producing firm. These types of mergers hardly produce competition concerns (Sharma, 2010). Economic theories suggest the following two ways of substantial lessening of completion in case of horizontal mergers of firms like between Kerry and Headland: Unilateral effects or non- coordinated effectsCo – ordinate effectsIt has been seen in the case of Kerry and Headlands merger that Kerry takes advantage of the increase in price after the merger. However, Kerry has not lost the sales volume as a result of increase in the price and remains profitable. It is because of the fact that competitive constraints between the two firms have been removed and the two merging firms take the merger as an incentive to increase the price. However, this effect can be reduced by creating of merger induced reduction in the marginal cost of the firm (Gopal Das Varma, 2009). The reduced competition between the merging firms can cause an increase in sales volume only because of the fact internationalization of the lost sales. The large sales volume and increase price make it easy for the firm to get the level of single firm dominance or ” oligopoly”. However, the ability to increase or decrease prices by the merged firm is independent of the cooperative response from the rest of competitors in the market. It shows that the merger between two entities will result to enhance market power of the merged companies and this ” power gain” can be the leading cause of substantial lessening of market competition. Irrespective of the fact that Kerry and Headland was the only supplier of the full range of FRM and were able to fulfill large volume orders of the customers. Customers have no choice to have another supplier of the product in the market and finding the products at the competitive prices. There is no supply side switching because of the fact that the supplier of CRM has found no plans of FRM supply in line with retailers. Thus the constraints from CRM on FRM are very weak that cannot limit Kerry’s increase in prices of FRM products. Kerry and Headland merger evidenced the change in price and quality in addition to changes in range and service of the product supplied to customers and suppliers. Change in price was the result of an increase in the cost of raw material and to maintain the level of margin. This is a phenomenal situation that price change occurs when the acquired firm as a result of the merger would no longer be the competitor of the acquiring firm (Wu, 2007). The same fact has been seen in the case of Kerry and Headland merger that change in price occurs as a result of the merger of the two firms. There it was assumed that price change occurs because of lack of competition in the market by the rest of the firm that will lead to single firm dominance (HART, 1983.). The increase trend in price of FRM products by Kerry seems to be the outcome of this single firm dominance aspect because of fewer suppliers of FRM in UK market (Commission, 2011). By observing the final report of the Kerry’s Carrickmacross factory it was observed that the effect of increase in price is overall that include the type of product, product segmentation in order to cuisine and in relation to customer. The change has been calculated by observing data of production cost including raw material costs and labour cost (Teece, 1980). There were six lines of cuisine in the market by the Kerry post merger that have mitigated the effect of the overall increase in price. Final reports described the fact that there is a moderate net price increase found on contract – packed FRM products to an individual customer. Further it is found that a net price increase in FRM products is based on the type of cuisine (Bianchi, n. d.). The net price increase for five products out of six was seen high but moderate for the one. However, the increase in value of these five FRM products was significantly larger than one of those six cuisines. This is what assumed that the merger has reduced market competition after observing a significant increase in price for many of the customers of Kerry post merger. The other way causing decrease in substantial loss of market competition as a result of mergers and acquisition like Kerry and Headland can be sorted out by coordinating effect of non-merging firms in the market. The phenomena of tacit collision can be used by these firms to reduce competition among them (Baker, n. d.). This will result in collective dominance and eventual decrease in market competition. It has been seen that the supply of FRM from the rest of enterprises has been increased by 25% (Trading, 2011). Mergers often produce cost synergies that can induce a price reduction as a counter effect to increase in price as a result of increase in market concentration (Awi Federgruen, 2011). The other reason that can lead to lessening of market competition as a result of the merger can be the increase of efficiency of production of the merging firms. The closing of Headland’s sites and investment in other processes would give the Kerry post merger an opportunity of highly efficient operation at Carrickmacross. It is because of the fact that the merger of firms can lead the two firms to attain innovative feature to be market leader and can help them to overcome their high cost and quality issues. The financial performance of the Headland was poor and significant risk was associated with time and budget attributes of its restructuring plan (Commission, 2011) as profit after interest in 2009-10 was (-9, 945) as compared to (-2, 593) in 2008-09. However, the two firms dealing in the same product line like FRM products, any sort of reduction in the number of customers of one entity can be recovered by the increased sales volume of the second entity (Commission, 2011). This aspect may be the source of the increase in non-price that may be higher than any increase in the price of the product. In merger analysis the efficiency can be the most important factor of lessening market competition. However, in the case of Kerry and Headland merger the non-price effect has produced different effects on the supplier’s experience of dealing with the Kerry post merger. The difference in price may not be smelled by many customers but Sainsbury’s response was highlighting problems in the flow of FRM supplies from the Kerry post merger. It has been seen that Bertrand (price) competition is more efficient than Cournot (quantity) competition in the merger of homogenous products because of the involvement of price and marginal cost (VIVES, 1985). It has been found in the final report that Kerry and Headland merger had increased their chances of getting production efficiency by installing new FRM production lines costing between £0. 5 million and £1 million with an ability to get estimates spare production capacity around 90–100 million units per year. Thus the merger between two firms may lead to decrease in their costs (Zhao, 2010) or can improve the quality and efficiency of their sources of production. This will result the effective competition in the market and the effect of any rival can be mitigated by collective efficiency. In the case of Kerry and Headland merger the supply of FRM increased by 15-25% after the merger from the level of 40-50% (Trading, 2011) that result in an increase in the combined share of the firms. This sort of merger also causes an increase in savings of marginal cost as a result of lower price with the affirmation of that these marginal cost savings must be merger specific and able to provide timely benefit to the customers. However, it is necessary that acquiring cost efficiencies as a result of merger must be verified and should not be the outcome of anti – competitive reduction in the quality of the product or service. Therefore it can be concluded that horizontal mergers like Kerry and Headland can be the source of reduction in competition that lead to increase in market power state of the merging firms. Similarly cost savings would result in achieving the level of economies of scale and scope for the merging firm that ultimately result in the reduction of market competition. This can be concluded that merger like Kerry and Headland can be a part of achieving substantial lessening in market competition. The expansion of capacity through the installation of the new line is not an expensive target especially in the presence of existing space to mount new product lines. Similarly the low margin of production can suggest minimum expansion while considering a suppliers’ response to current prices. However there is possibility that the current price limitation has forced the customers to switch to various suppliers. As in the case of Kerry and Headland merger, before the merger customers have no alternative supplier to the merging parties. But the increase in price for even for a short term as a result of the merger has forced the customers to seek an incentive of finding alternative suppliers reducing the number of significant competitors supplying FRM products to the UK. Thus the availability of supplier with a full range of FRM products will force the customer towards that supplier and this situation will force Kerry to impose a high price on FRM products only for a short period of time as price competition is more efficient than quantity (NDVSHEK, 1980). In order to attain high margin for a long period of time the merging firm have to follow coordinate behaviour or collective dominance.