The circumstance on merger between two contending firms- British telecommunication organization, Vodafone Airtouch and German cellular professional, Mannesmann AG- will be my highlight of this report. In short, this case illustrates a hostile takeover by Vodafone. Vodafone initiates the merger as it recognizes it as a chance for the organization to develop in a speedily changing marketing communications technology environment in Europe at that point in time. In the beginning, Mannesmann turned down the proposal. However, in a twist of event, it was eventually still left without a choice but to merger with Vodafone. Third people were enraged as they treat this move as anticompetitive. They argued that the merging entity would gain dominant market power, increase barriers to entry and experience economies to scale that they could only imagine. The truth was brought forth to the Western european Payment which only allow for the merger to achieve success after Mannesmann de-merge with Orange and also after Vodafone guaranteed that it will enable alternative party non-discriminatory usage of the merged entity's integrated network to be able to provide advanced mobile services with their individual customers. The Commission rate viewed these undertakings as sufficient to eliminate your competition concerns from the inability of third gatherings to provide competitive seamless pan-European mobile services.
In this statement, I'll evaluate the economical benefits, how merger impacts upon consumers and/or providers profit, as well as, the total welfare. I'll also touch how merger has the potential to reduce competition and lastly, the reasoning of your competition authority's decision that contributes to the success of the merger.
The merger between Vodafone is Mannesmann is known as to be always a horizontal one since both companies runs within telecommunication industry. The merger of both entities reduces the amount of competing companies by one and at the same time, increases the industrial concentration. Theoretically, a reduction in number of firms competing reduces resource whilst increasing prices of the nice which is regarded as to be harmful to consumers. The idea of increasing/diminishing consumer surplus is further discussed later in the statement.
It is not necessarily true that fewer firms and higher prices always result in higher income for the merging organizations. For instance, success of each company is ј in a four-firm industry. So, income of two specific firms simply add up to Ѕ. Now, three firms remain after the merger of two. We notice a drop in profitability from Ѕ to 1/3 for the merged organizations. And even though higher industrial concentration enhances sales, this upsurge in sales is not enough to offset the climb in prices billed. Success still declines making the merging businesses worse off. Thus, charging at price equals to marginal cost provides no incentive to merge unless all companies on the market merge to form a monopoly.
Having mentioned the above, merger doesn't only happen only when all firms combine. In reality, conditions such as Vodafone/Mannesmann confirmed that mergers can result in cost lowering. The efficiency that arises could be strong enough to drive this merger. Organizations would want to produce anyway point of the AC curve where they will be producing proficiently. They avoid duplication of set costs when they consolidate management rather than employing two different people to perform the same task. In so doing, the firms are able to lower their cost of labour. In addition, both firms are only necessary to pay a fixed cost such as land and functioning facilities, only once following the merger. Effectively, a cost saving of the preset cost increase profits, providing an incentive to merge in particular when they increase their prices. Hence, the firms may do away with redundant labour, investments and facilities.
As we know, a merger would lead to a rise in cost as lesser companies are left contending on the market. Organizations are better off with an increased price imposed on consumers and when they gain from higher producer surplus. The opposite applies for consumers who are worse off when prices increase. If the increase in company surplus outweighs the reduction in consumer surplus, total welfare is thought to have increase.
However, when the merger reduces marginal cost for Vodafone and Mannesmann, the merged firms may spread such less expensive with their consumers in the form of lower prices. Lower prices are generally beneficial to consumers. As consumer surplus surge, there will be a subsequent upsurge in total welfare.
Moreover, there might again be cost efficiencies which make clear why merged companies can incur less marginal cost than both pre-merger businesses. Synergies can be easily exploited between your merging firms. Each firm is aware of the particular other firm is capable of doing and thus, they only produce goods and services that give them the competitive benefits. Overall, a show up in marginal cost means cost saving that facilitates profitability. This profitability, in turn, promotes merger.
P1 = C1
C2 Demand, D
0 Q2 Q1 Amount, Q
Figure 1: Diagram illustrating welfare ramifications of a cost reducing merger (Modified from lecture slides)
From Physique 1, there is absolutely no maker surplus when price equals to cost (P1 = C1). Businesses are only generating profits while producing at Q1. At this time, consumer surplus resides in the area under the demand curve and above the C1 horizontal cost curve. After the merger between Vodafone and Mannesmann, lesser firms are still left competing and therefore, price boosts from P1 to P2. Consumers are little by little worse off with the climb in cost. Now, their surplus is reduced to the region under the demand curve and above P2. The region enclosed within P2, P1 and Q2 is the surplus that is transferred from consumer to company. On the other hand, the triangular areas under the demand curve, but bounded within Q1, Q2 and P1 indicates the deadweight reduction. This deadweight reduction refers to the surplus that is no more gained by consumers and manufacturers.
Concurrently, there may be synergies between your merging businesses that enable cost keeping. This cost efficiency lowers cost from C1 to C2. Firms are better off. As shown in Number 1, the area enclosed within P2, C2 and Q2 signifies total developer surplus after the merger. The region within C1, C2 and Q2 is the surplus gained by manufacturers from synergy that render better opportunities to grow margins.
Looking at the above, we see that it's beneficial for companies to combine as they incur designer surplus. Total surplus improves as a result of a rise in developer surplus.
Moving on, we will consider competition with regards to the merger between Vodafone and Mannesmann. Let's assume that there is no cost saving, a rise in price anticipated to merger will ultimately erode consumer surplus greatly, to a spot where losses to consumer outweigh benefits to producers. From the producer's perspective, this may provide an incentive to allow them to seek excuses to merge. They could falsify information to convince competition authorities to approve merger.
Taking the impact of merger into account, competition specialists have to critically decide on whether to approve a merger especially those which involve large organizations like Vodafone and Mannesmann. Such decision process will require them to get hold of appropriate information which is not necessarily easy to obtain.
One main concerned of competition regulators is the size of the merged company. Marketplaces dominated by large firms tend to further inflate prices and force down consumer's welfare. With regards to the case at hand, competition authorities were initially hesitant to offer merger to both firms. They were concerned that merger between your two large firms will come out disastrous because they are already producing beyond Q* because of their utter size. Approving their merger would only mean that these organizations operate beyond the MES. Businesses that merge at this stage face diseconomies of level when cost is motivated up as they continue steadily to increase output along the AC curve.
Cost, C Average Cost, AC
0 Q* Variety, Q
Figure 2: Diagram illustrating Minimum Efficient Level (MES) on the AC curve.
Rival firms strongly disapprove Vodafone's proposal to combine with Mannesmann as they view the move to be anti-competitive. They argued that the merged entity will be able to provide exclusive services on a seamless basis because the merged entity gets the built in network that such services require. Within the proposal, however, Vodafone said that if an interconnected network have develop it would not give rise to competition concerns, both because there will be scope for such systems to build up, and because there will be other routes for operators to ensure fair competition within the telecommunication industry. In any event, Vodafone considers that other operators will be in a posture to provide "seamless" services on the same scope soon.
COMPETITION Specialists' DECISIONS
The Commission's exploration has shown that with the complexities involved in agreeing on the modification on the existing network configuration, centralised management alternatives and cost and income allocation can make it exceedingly difficult for third parties to replicate. In addition to the uncertainty as to the replication of the merged entity's network through the right combo of mergers, this process would be extremely costly, frustrating and fraught with regulatory delays given the need for regulatory authorization. This is recognized by the significant number of failures over the past years in building similar alternatives in related market segments within the framework of joint endeavors or proper alliances.
The merged entity would be the only mobile operator in a position to capture future progress through new customers who be drawn by the seamless services offered by Vodafone/Mannesmann on its own network. Rival organizations which could not give a similar service to attract enough market stocks will find themselves burning off out in the competition. Furthermore, given their inability to reproduce the new entity's network, competitors will have, at best, i. e. if they're allowed access to Vodafone's network at all, significant costs and performance/quality disadvantages given its dependency on Vodafone/Mannesmann. The merged entity's capacity to refuse third parties' usage of the its network or even to allow gain access to on conditions and conditions entrench the merged entity into a prominent position and diminishes third party offerings.
What's more, customers would generally choose Vodafone/Mannesmann to other mobile operators given its unrivalled likelihood to provide advanced seamless services across European countries. This reinforces the merged entity's position in the industry as a dominating player.
And through its unrivalled large customer basic and position, Vodafone/Mannesmann will be in a unique bargaining ability against handset manufacturers to negotiate design functionalities unavailable to fighting providers. Customizing handsets make it more difficult for roamers from rivalling mobile operators to adopt benefit of the advanced pan-European services available over Vodafone's network. Again, opponents miss out if the merger were to be approved.
Upon inspection the Authorities discovered that the merged entity would face stiff competition from other providers and will not enjoy a dominant purchasing electric power in the long run. They arranged that the merged entity is a strong buyer in the market for mobile handsets and network equipment, but there remain many other equivalent incumbents competing in the market. So, the merged entity wouldn't normally achieve the required buying capacity to become prominent on the marketplace.
In the light of the above the government bodies concluded, " the notified business deal will not lead to the creation or building up of a prominent position in the global market segments for mobile handset and mobile network equipment therefore of which effective competition would be significant impeded in those markets. " Meaning to state, the specialists do not view the merger as a significant danger since it's forces would have been neutralized by other relevant competition within the industry.
Further precautions were taken in ensuring fair competition within the industry as seen in the demerger of Orange with Mannesmann. This move is aimed at diluting the capabilities of Vodafone and Mannesmann following the approval of these merger. It is a well-received decision as it gets rid of the competitive overlaps in britain and Belgian marketplaces of telecommunication services.
Besides Vodafone has, on its own profile, pledged to enable third party non-discriminatory access to the merger entity's built in network which includes undertakings which cover exclusive roaming agreements, third functions' usage of roaming preparations, third parties' usage of wholesale arrangements, expectations and SIM-cards and a set of implementing measures targeted at ensuring their effectiveness. In addition, it has proposed to create a fast monitor dispute resolution technique in order to solve disagreements in the stated aspects and to reduce its anticompetitive position. The undertakings as well as demerger is thought to be justifiable since it minimizes your competition concerns from the lack of ability of third functions to provide similar competitive smooth pan-European mobile services.
In realization, Vodafone's proposal to merge with Mannesmann is seen as an anticompetitive menace to other telecommunication service provider. Rival companies were concerned that the merger would bestow substantive market capacity to the merged entity. Thus, they were strongly against the merger proposal. However, after much consideration by the competition authorities, they figured the merger would not inflict much menace because of the presence of lots of strong, large and powerful potential buyers in the market which prevent Vodafone/Mannesmann from obtaining dominating position on the provision of the related services. Furthermore, the demerger of Orange with Mannesmann will erode market vitality of the merged entity. Furthermore, Vodafone submit undertakings that allow third get-togethers access to its networks. Following the implementation of the undertakings, third functions will maintain a position to provide contending advanced pan-European mobile services which also avoid the emergence of the prominent position on the provision of these services. The likelihood to provide similar services in competition with Vodafone will, subsequently, also develop incentives for third parties to develop fighting systems. Therefore, the government bodies approved of the merger between Vodafone and Mannesmann.
To some degree, I disagree that the merger should be approved. The government bodies' discussion that the presence of comparable incumbents will be sufficient in reducing market power of the merged entity comes across as weak to me. Only handful of such incumbents operate within the telecommunication industry. Thus, it's influence on the merged entity's market power is almost negligible. Vodafone/Mannesmann could still operate such as a monopoly by arranging high prices and reducing output while erecting hurdle to entrance to deter competition. Consumer welfare would be greatly harmed consequently of the merger.
On the other side, I support the merger as it induces innovations. In today's competitive contemporary society, only the most powerful emerge as champions. Therefore, rival firms may spend money on Research and Development (R&D) in creating an ground breaking communicative technology or network system that provides it a competitive edge over Vodafone/Mannesmann existing resources. This promotes a forward-looking competitive that benefits population as a whole. Producers gain as it may develop suggestions to increase efficiency while consumers may gain from perhaps cheaper pricing that is offered to them from lower creation cost incurred by companies.
European Competition Commission payment, http://ec. europa. eu/competition/mergers/cases/decisions/m1795_en. pdf, assessed on 11 November 2010
Kendall (2010), Market segments, Competition and Legislation Lecture Notes Procedure 8: Mergers; and Treatment 9: Competition Policy
Merger Control and Remedies Plan in the E. U and U. S: the situation of Telecommunications Mergers, http://www. cerna. ensmp. fr/Documents/GLB-TelecomMergerRemedies. pdf, evaluated on 12 November 2010
United Kingdom Competition Percentage, http://www. competition-commission. org. uk/rep_pub/reports/2003/475mobilephones. htm#full, reached on 15 November 2010
Europa Press Release Rapid "Fee clears merger between Vodafone Airtouch and Mannesmann AG with conditions", http://europa. eu/rapid/pressReleasesAction. do?reference=IP/00/373
http://reports. bbc. co. uk/2/hi/business/630166. stm, evaluated on 16 November 2010
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