INTRODUCTION

The case on merger between two competing firms- British telecommunication firm, Vodafone Airtouch and German cellular provider, Mannesmann AG- shall be my highlight of this report. In short, this case illustrates a hostile takeover by Vodafone. Vodafone initiates the merger as it sees it as an opportunity for the firm to expand in a rapidly changing communications technology environment in Europe at that point in time. Initially, Mannesmann rejected the proposal. However, in a twist of event, it was eventually left without a choice but to merger with Vodafone. Third parties were enraged as they view this move as anticompetitive. They argued that the merging entity would gain dominant market power, raise barriers to entry and reap economies to scale which they could only dream of. The case was brought forth to the European Commission which only allow for the merger to succeed after Mannesmann de-merge with Orange and also after Vodafone ensured that it will enable third party non-discriminatory access to the merged entity’s integrated network so as to provide advanced mobile services to their respective customers. The Commission viewed these undertakings as sufficient to remove the competition concerns linked to the inability of third parties to provide competitive seamless pan-European mobile services.

In this report, I’ll analyze the economic benefits, how merger impacts upon consumers and/or producers benefit, as well as, the total welfare. I’ll also touch on how merger has the potential to reduce competition and finally, the reasoning of the competition authority’s decision that leads to the success of the merger.

ECONOMIC ANALYSIS

The merger between Vodafone is Mannesmann is considered to be a horizontal one since both companies operates within telecommunication industry. The merger of the two entities reduces the number of competing firms by one and at the same time, increases the industrial concentration. In theory, a reduction in number of firms competing reduces supply whilst increasing prices of the good which is deemed to be harmful to consumers. The concept of improving/diminishing consumer surplus is further discussed later in the report.

It is not always true that fewer firms and higher prices necessarily translate into higher profits for the merging firms. For instance, profitability of each firm is ¼ in a four-firm industry. So, profits of two individual firms simply add up to ½. Now, three firms remain after the merger of two. We observe a decline in profitability from ½ to 1/3 for the merged firms. And although higher industrial concentration improves sales, this increase in sales is not enough to offset the rise in prices charged. Profitability still declines making the merging firms worse off. Thus, charging at price equals to marginal cost provides no incentive to merge unless all firms in the industry merge to form a monopoly.