In horizontal mergers companies in the same industry are taken-over or merged with another corporation in the same industry. In this situation a company takes over another in the same line of business, in order for improving market shares and create more efficient economies of scale. In case where it is meant to remove competitor or reduce competition, the arrangement would be in violation of the anti trust laws.
Horizontal mergers may be in contravention of the competition laws. Depending on the size of the merging companies, the elimination of competition among the amalgamating corporations may be materially significant. Large horizontal mergers are perceived as anti competitive. Moreover, the unification may result in substantial market dominance that could enable the new combined corporation to hike prices by curtailing output unilaterally. Further, the reduction in the number of participants in the market or industry will enable them to collusively collaborate on pricing and output, to the grave prejudice and utter detriment of the consumers.
Federal laws take care of consumer interest by prohibiting companies from creating such anticompetitive situations.
The determinants of market concentration used to enforce the Merger Guidelines of 1968, issued by the Federal Trade Commission (FTC) in collaboration with the Anti Trust Division of the US Department of Justice (USDOJ), came in under criticism on the ground of standing in the way of economies of large scale and efficiency. Even dominance of enterprises solely by dint of merit was penalized during this regime.
In 1982, Associate Attorney General Bill Baxter issued a fresh set of guidelines, based on microeconomic theory. These applied the Herfindahl index to determine the degree of market dominance as measures of market concentration. These new set of guidelines accommodated economies of large scale and efficiency of production as the basis of merger schemes. Accordingly, they raised the permissible level of market dominance in the scrutiny of merger proposals to foster greater efficiency
