Industrial Combinations

Industrial Combination: Industrial combination, also known as integration, involves the merging of two or more firms to create a single, economically stable entity.   Reasons for Industrial Combination: Firms may integrate to combat economic recession, capitalize on monopoly advantages, ensure stable prices, secure direct sources of raw materials, reduce production costs, increase profits, meet statutory […]

Industrial Combination:

Industrial combination, also known as integration, involves the merging of two or more firms to create a single, economically stable entity.

 

Reasons for Industrial Combination:

Firms may integrate to combat economic recession, capitalize on monopoly advantages, ensure stable prices, secure direct sources of raw materials, reduce production costs, increase profits, meet statutory capital requirements (e.g., for banks), and achieve large-scale production.

 

Types of Firm Combinations:

1. Vertical Combination: Joins firms at different production/distribution stages.

    1. Backward Integration: Manufacturer controls raw material supply.
    2. Forward Integration: Manufacturer controls product demand.

 

2. Horizontal Combination: Combines firms at the same production stage.

3. Lateral Combination: Merges firms in different business lines.

 

Forms of Industrial Combinations:

1. Cartel (Kartel): Voluntary association of firms producing the same product (e.g., OPEC).

Aims to control prices, output, eliminate competition, maximize profit, serve as a political/economic bloc, assist member countries, and improve trade relationships.

2. Trust: Amalgamation of competing firms under single control; members retain identities.

Aims to bring firms under central control, eliminate competition, increase efficient production, reduce costs, and maximize profit.

3. Differences between Cartel and Trust:

  1. Trust: Members lose independence; complete merger.
  2. Cartel: Members maintain independence; voluntary with the option to withdraw.

4. Consortiums: Independent firms combine resources for large or complex projects, sharing profits/losses.

5. Price Rings: Firms agree on uniform prices for similar products, setting minimum prices.

6. Holding Company: Controls 51% or more equity shares in subsidiaries, primarily an investment organization.

7. Amalgamation/Merger: Fusion of independent firms into a new entity with a new name.

 

Reasons/Advantages of Mergers:

  1. Raise large capital.
  2. Control a larger market share.
  3. Encourage research and development.
  4. Enjoy large-scale production advantages.
  5. Lower production costs.
  6. Discourage unhealthy competition.
  7. Diversify activities.
  8. Mobilize specialized managerial skills.
  9. Prevent overproduction.
  10. Save advertising costs.
  11. Control outputs and stabilize prices.
  12. Enhance management efficiency.
  13. Centralized management.

 

Disadvantages of Mergers/Industrial Combinations:

  1. Lead to monopoly.
  2. Discourage specialization.
  3. Deny consumer choice.
  4. Reduce product quality due to lack of competition.
  5. Cause unemployment.
  6. Force other firms out of business.
  7. Increase difficulty in managing large firms, leading to efficiency decline.
  8. Exploit consumers by monopolies.
  9. Pose a danger of over-capitalization.

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