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Business Combination

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Introduction of Business Combination


Changing market scenario requires firms to cooperate instead of competition It reduces costs due to combination It reduces research and development cost Prices can be controlled and minimized Voluntary association of two or more business units for achievement of some common objective, mostly to avoid competition.

Horizontal Combination

Vertical Combination

Types of Business Combination

Circular Combination

Diagonal Combination

Types of Combination
Horizontal Combination:
Two or more similar nature of business units are combined under one management is called Horizontal Combination/Parallel. If number of firms producing sugar are combined under single management it is called Horizontal Combination.

Advantages:
Reduce cost, competition, selling expenses, Increase profit, achieve better quality management, supply goods at lower cost, use improve methods of production, control over production etc

Types of Combination
Vertical Combination:
When various departments of large industrial units are combined under one management is called Vertical Combination. If the business units engaged in cotton spinning cotton weaving cotton processing and cotton wholesaling are combining together, it is called Vertical Combination. Sugar mill makes contracts with sugarcane growers for the sales of their entire produce to the mill. Shoemaker plus tanner

Advantages:
Regular supply of raw material, better selling goods, reduce per unit cost, control over production, reduce middlemans commission, better management

Types of Combination
Circular Combination:
An association of firms engaged in different types of business is termed as Circular/mixed/complementary Combination. Example PIA also operates hotels and restaurants and rent a car services.

Advantages:
Better management of business, increase the efficiency of business, better credit facility, saving in advertising expenses, better research system

Types of Combination
Diagonal Combination:
When a big business organization combines with itself another business that provides auxiliary services to the main business, the combination is termed as diagonal combination or service combination. For example, a cement factory for the physical distribution of its output acquires services of a transport company on the condition that the transport company shall serve no other company except the cement factory

Causes/Reasons of Combination
Price competition Operation below optimum level Technological advancement Insufficient demand Insufficient capital Insufficient expertise Changes in Government Policies Affects of Trade Cycle Over Production Expected Monopolistic Gains Joint Stock Companies

Forms of Business Combinations


Trade Association
Chamber of Commerce

Ring Corner Syndicate Market pool

Cartel Trust
Holding Company

Merger Absorption Amalgamation

Forms of Business Combinations


Trade Associations Combination of entrepreneurs engaged in particular trade or industry Or combination of entrepreneurs of particular locality Purpose Economic interest of members To build friendly relations Trade association forms its own bylaws and member firms follow these laws.

Chamber of Commerce
Voluntary associations of businesses on regional basis Formed to promote trade, commerce and industry in its region Formed to facilitate members in research, legal assistance, arbitration, market information etc. It also gives suggestion to Govt.

Ring (Federations)
Cooperation among producers of Particular commodity There is an agreement to restrict their output to a certain limit Production quotas are fixed for the members Formed to avoid overproduction

Corner
Combination of traders of particular commodity Traders of that commodity buy it in bulk They take most of the share from the market, in result supply from others sources is reduced So they avoid competition both in buying and selling They effect the sale price by controlling demand and supply of commodity

Syndicate
Cooperation among competing firms Formed to avoid competition and control market prices by regulating supply Members sell their product to syndicate at fixed price Syndicate is then responsible for sale in market Profit earned by syndicate is divided amongst members at agreed ratio.

Market Pool
Here firms combine and divide the segments of market Members restrict their sale to a certain area At might be on the geographical basis, or type of customers or any other basis

Cartel
Members join to provide uniform terms of trade to customers Members fix minimum sale price, and uniform offers like discount, packaging, quality, terms of payment etc. OPEC etc.

Trust
American origin of business combination Established through temporary consolidation Shareholders transfer a controlling amount of their shares to a board of trustees.

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Degrees of Competition
Oligopoly
Monopolistic Competition

One
Monopoly

Many
Perfect Competition

Sellers

Perfect/Pure Competition
Competition- 2+ Businesses Vie For Same Resources/Customers Condition- No Single Firm Dominant Principles
Buyers View Products As Similar Buyers/Sellers Know Each Others Prices/Costs Easy To Enter/Leave Marketplace

Prices Set By Supply/Demand & Accepted by Sellers/Buyers

Monopolistic Competition
Many Buyers
Fewer Sellers Than Perfect/Pure Competition Buyer Perception of Product/Brand Differentiation

Oligopoly
Few Large Sellers Market Entry Difficult High Capital Investment
Sellers Control Strategies

Monopoly
Characteristics
Only One Producer Controls Industry Pricing

Natural Monopoly
One Producer Can Efficiently Supply All Goods/Services