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Firms: Types, Production and Costs: Question 1

Syllabus 3.4

Multiple choice 1 mark

Solene Dairies processes fresh milk into cheese and yoghurt for supermarkets. It has just merged with Pixelforge Studios, a firm that designs and sells mobile phone games. Before the merger, the two firms had no trading relationship with each other, and Pixelforge Studios does not supply, distribute or compete with any of Solene Dairies' dairy products.

What type of merger has taken place between Solene Dairies and Pixelforge Studios?

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Worked solution

Step 1: Identify what each firm actually produces

Solene Dairies processes milk into cheese and yoghurt, it operates in the food and drink industry. Pixelforge Studios designs and sells mobile phone games, it operates in the entertainment/software industry. These two goods have nothing to do with each other: cheese and yoghurt are not inputs into game design, and games are not sold through dairy supply chains.

Step 2: Apply the definitions of each type of merger

  • Horizontal merger: two firms at the same stage of production in the same industry, e.g. two dairy processors merging.
  • Vertical merger: two firms at different stages of the same production or supply chain.
    • Backward vertical merger: merging with a firm supplying an earlier stage or input, such as a farm supplying milk to a dairy processor.
    • Forward vertical merger: merging with a firm closer to the final consumer, such as a supermarket that sells the processor’s dairy products.
  • Conglomerate merger: two firms in unrelated industries, producing unrelated goods or services, with no supply-chain link between them.

Step 3: Classify this merger

Pixelforge Studios neither supplies an input into, nor sells on, Solene Dairies’ cheese and yoghurt, and the two firms do not compete for the same customers. Since dairy products and mobile games are entirely unrelated goods with no production or supply-chain connection between the two firms, this merger is a conglomerate merger.

Step 4: Rule out the other options

  • A (horizontal) would require Pixelforge Studios to also process and sell dairy products, competing directly with Solene Dairies. It does not; it makes mobile phone games.
  • B (backward vertical) would require Pixelforge Studios to supply an ingredient, packaging or equipment used in making cheese or yoghurt, a games studio supplies none of these.
  • C (forward vertical) would require Pixelforge Studios to distribute or retail Solene Dairies’ cheese and yoghurt to consumers. A mobile games studio does not sell dairy products at all.

Final answer

Solene Dairies and Pixelforge Studios operate in completely unrelated industries with no supply-chain or competitive link between them, so this is a conglomerate merger, option D.