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Category: Business and Industry
Date Submitted: 12/18/2012 11:16 AM
How monopolies can develop
Monopoly power can come from the successful organic (internal) growth of a business or through mergers and acquisitions (also known as the integration of firms).
Horizontal Integration
This is where two firms join at the same stage of production in one industry. For example two car manufacturers merge, or a bank successfully takes-over another bank. A good recent example in the UK is the merger between Safeway and Morrisons to create the UK’s fourth largest national food retailer. Another example came in July 2004 with the merger between Travel Inn and Premier Lodges to form Premier Travel Inn. And in August 2005, German sports goods firm Adidas announced an agreement to buy US rival Reebok for £2.1bn.
Vertical Integration
This is where a firm develops market dominance by integrating with different stages of production in the industry e.g. by buying its suppliers or controlling the main retail outlets. A good example is the oil industry where many of the leading companies are explorers, producers and refiners of crude oil and have their own retail networks for the sale of petrol and diesel and other products.
• Forward vertical integration occurs when a business merges with another business further forward in the supply chain
• Backward vertical integration occurs when a firm merges with another business at a previous stage of the supply chain
The Internal Expansion of a Business
Firms can generate higher sales and increased market share by expanding their operations and exploiting possible economies of scale. This is internal rather than external growth and therefore tends to be a slower means of expansion contrasted to mergers and acquisitions. To go back to our previous example, US computer giant Dell succeeded in raising total sales revenue by 58 per cent over the last five years.
Preventing competition - barriers to entry
Barriers to entry are the means by which potential competitors are blocked. Monopolies...