Mergers, especially horizontal mergers, are a characteristic trait of oligopolistic industries. Intense competition and interdependent decision-making encourages oligopolistic firms to cooperate. One way to lessen the competition among an oligopolistic rival is to join forces through a merger. The other way is through collusion.

Mergers fall into one of three classes--(1) horizontal--two competing firms in the same industry that sell the same products, (2) vertical--two firms in different stages of the production of one good, such that the output of one business is the input of the other, and (3) conglomerate--two firms that are in totally, completely separate industries.

Horizontal Merger

Because a horizontal merger is between competitors in the same market or industry, it tends to reduce competition and increase the market control of the remaining firms, especially the newly merged firm.

Because horizontal mergers tend to lessen competition in an oligopolistic industry, they are also closely scrutinized by the Department of Justice, the prime enforcer of antitrust laws. Most big-time mergers, those among industry leaders, are typically reviewed by the Department of Justice for their potential impact on competition.

However, in some cases, a merger between two competing firms is actually encouraged by the Department of Justice as a means of increasing, rather than reduce competition. How so? If the merger is between the second and third largest firms in the industry, and the resulting merged firm is about the same size as the largest firm, then such a merger might get an easy thumbs-up. The logic is that two firms of nearly equal size would tend to be more competitive than one large firm and two smaller ones.

Vertical Merger

A vertical merger is generally pursued to stabilize the input-output connections needed for production. Rather than relying on a separate company to supply a vital input like sugar, by merging with Sweet Tooth Sugar Company, OmniCola controls the supply of this input.

While vertical mergers are generally harmless when it comes to market control and competition, and do not usually come under government scrutiny, problems can arise. If, for example, Sweet Tooth Sugar Company is also a primary source of sugar for other companies in the Shady Valley soft drink market, then OmniCola might use control of this company to charge competitors higher prices and place them at a competitive disadvantage.

Conglomerate Merger