Merger between Vodfone and Mannesmann

jointure mingled with Vodf cardinal and MannesmannINTRODUCTIONThe case on spinal fusion between two competing firms- British telecom firm, Vodafone Airtouch and German cellular provider, Mannesmann AG- shall be my highlight of this report. In short, this case illustrates a hostile memorizeover by Vodafone. Vodafone initiates the spinal fusion as it sees it as an opportunity for the firm to expand in a rapidly changing communications technology environment in Europe at that request in time. Initially, Mannesmann rejected the proposal. However, in a twist of event, it was eventually left field with go forth a choice but to fusion with Vodafone. Third parties were enraged as they view this move as anti warlike. They argued that the get together entity would gain governing market great effect, raise barriers to entry and reap economies to descale which they could b bely dream of. The case was brought forth to the European Commission which only allow for the optical fusion to succeed aft(prenominal) Mannesmann de- meld with Orange and in like manner after Vodafone ensured that it give enable trinity companionship non-discriminatory advance to the unify entitys incorporated entanglement so as to provide advanced erratic serve to their respective customers. The Commission viewed these undertakings as sufficient to remove the tilt c at one timerns link up to the inability of threesome parties to provide competitive seamless pan-European roving function.In this report, Ill analyze the economic benefits, how jointure impacts upon consumers and/or producers benefit, as advantageously as, the total welf atomic scrap 18. Ill also touch on how coalescer has the capableness to reduce competition and finally, the reasoning of the competition authoritys finale that leads to the success of the uniting.stinting ANALYSISThe merger between Vodafone is Mannesmann is considered to be a horizontal one since both companies break downs in spite o f appearance telecommunication industry. The merger of the two entities reduces the number of competing firms by one and at the same time, increases the industrial concentration. In theory, a drop-off in number of firms competing reduces supply whilst increasing determines of the good which is deemed to be insalubrious to consumers. The concept of improving/diminishing consumer senseless is further discussed later in the report.It is non always true that fewer firms and higher legal injurys necessarily reiterate into higher profits for the merging firms. For instance, profitability of each firm is in a four-firm industry. So, profits of two individual firms simply add up to . Now, three firms remain after the merger of two. We observe a decline in quality in profitability from to 1/3 for the merged firms. And although higher industrial concentration improves sales, this increase in sales is not enough to trigger the fig up in prices charged. Profitability still declines making the merging firms worse off. Thus, charging at price equals to b are(a) apostrophize provides no incentive to merge unless all firms in the industry merge to form a monopoly.Having mentioned the preceding(prenominal), merger doesnt only take place only when all firms merge. In reality, cases much(prenominal) as Vodafone/Mannesmann showed that mergers can lead to cost reduction. The efficiency that a pilfers could be salubrious enough to drive this merger. Firms entrust want to produce at the negligible point of the AC shorten where theyll be producing efficiently. They avoid duplication of glacial be when they consolidate management and not employing two people to arrange an identical task. By doing so, the firms are able to dismantle their cost of labour. In addition, both firms are only take aimd to pay a mulish cost much(prenominal) as land and operating facilities, only once after the merger. Effectively, a cost saving of the fixed cost pull up stakes inc rease profits, providing an incentive to merge especially when they increase their prices. Hence, the firms whitethorn do away with redundant labour, assets and facilities.As we know, a merger would lead to a rise in price as lesser firms are left competing in the industry. Firms are better off with a higher price imposed on consumers and when they gain from higher producer surplus. The opposite applies for consumers who are worse off when prices increase. When the increase in producer surplus outweighs the diminution in consumer surplus, total welfare is said to acquit increase.However, when the merger reduces marginal cost for Vodafone and Mannesmann, the merged firms may pass on such lower cost to their consumers in the form of lower prices. Lower prices are in general beneficial to consumers. As consumer surplus rise, there allow for be a subsequent increase in total welfare.Moreover, there might once again be cost efficiencies which explain why merged firms can drive a lo wer marginal cost than the two pre-merger firms. Synergies can be easily exploited between the merging firms. Each firm knows what the early(a) firm is capable of doing and thus, they only produce goods and run that give them the competitive advantage. Overall, a fall in marginal cost would mean cost saving that facilitates profitability. This profitability, in turn, promotes merger.Price, PP2P1 = C1C2 Demand, D0 Q2 Q1 Quantity, QFigure 1 Diagram illustrating welfare effects of a cost reducing merger (Adapted from lecture slides)From Figure 1, there is no producer surplus when price equals to cost (P1 = C1). Firms are only earning profits while producing at Q1. At this breaker point, consumer surplus resides in the area under the demand curve and above the C1 horizontal cost curve. After the merger between Vodafone and Mannesmann, lesser firms are left competing and therefore, price increases from P1 to P2. Consumers are gradually worse off with the rise in price. Now, their surp lus is reduced to the area under the demand curve and above P2. The area enclosed within P2, P1 and Q2 is the surplus that is transferred from consumer to producer. On the other(a) hand, the triangular areas under the demand curve, but bounded within Q1, Q2 and P1 signifies the deadweight damage. This deadweight loss refers to the surplus that is no longer gained by consumers and producers.Concurrently, there could be synergies between the merging firms that enable cost saving. This cost efficiency lowers cost from C1 to C2. Firms are better off. As shown in Figure 1, the area enclosed within P2, C2 and Q2 represents total producer surplus after the merger. The area within C1, C2 and Q2 is the surplus gained by producers from synergy that render better opportunities to grow margins.Looking at the above, we see that it is beneficial for firms to merge as they incur producer surplus. check surplus improves as a result of a rise in producer surplus.Moving on, we shall consider compe tition with regards to the merger between Vodafone and Mannesmann. assume that theres no cost saving, a rise in price due to merger allow ultimately erode consumer surplus substantially, to a point where losses to consumer outweigh gains to producers. From the producers point of view, this may provide an incentive for them to want excuses to merge. They may falsify information to convince competition governance to adore merger.Taking the impact of merger into account, competition authorities have to critically decide on whether to approve a merger especially those which mean large firms like Vodafone and Mannesmann. Such decision process will require them to get hold of accurate information which is not always lightheaded to obtain.One main pertain of competition authorities is the size of the merged firm. Markets dominated by large firms tend to further inflate prices and vehemence down consumers welfare. With reference to the case at hand, competition authorities were i nitially reluctant to grant merger to both firms. They were concerned that merger between the two large firms will turn out disastrous as they are already producing beyond Q* due to their sheer size. Approving their merger would only mean that these firms operate beyond the MES. Firms that merge at this stage face diseconomies of scale when cost is driven up as they dwell to increase takings along the AC curve.Cost, C Average Cost, ACMES0 Q* Quantity, QFigure 2 Diagram illustrating Minimum Efficient outgo (MES) on the AC curve.Rival firms powerfully disapprove Vodafones proposal to merge with Mannesmann as they view the move as being anti-competitive. They argued that the merged entity will be able to provide exclusive services on a seamless basis because the merged entity has the integrated network that such services require. In the proposal, however, Vodafone claimed that if an interconnected network did develop it would not give rise to competition concerns, both because there will be scope for such networks to develop, and because there will be other routes for operators to ensure fair competition within the telecommunication industry. In any event, Vodafone considers that other operators will be in a localization to provide seamless services on the same scope in the near prospective.COMPETITION AUTHORITIES DECISIONSThe Commissions probe has shown that with the complexities involved in agreeing on the modification on the existing network configuration, centralised management solutions and cost and profit allocation will agree it exceedingly difficult for third parties to replicate. In addition to the uncertainty as to the replication of the merged entitys network by means of the right compounding of mergers, this process would be extremely costly, time consuming and fraught with regulative delays precondition the need for regulatory approval. This is supported by the significant number of failures over the past years in building equal solutions in related markets within the framework of joint ventures or strategic alliances.The merged entity would be the only mobile operator able to capture future growth through new customers who would be attracted by the seamless services offered by Vodafone/Mannesmann on its own network. Rival firms which could not offer a comparable service to attract enough market shares will cause themselves losing out in the competition. Furthermore, given their inability to replicate the new entitys network, competitors will have, at best, i.e. if they are allowed access to Vodafones network at all, significant costs and performance/quality disadvantages given its dependency on Vodafone/Mannesmann. The merged entitys power to refuse third parties access to the its network or to allow access on terms and conditions entrench the merged entity into a overabundant position and diminishes third party offerings.Whats more, customers would generally prefer Vodafone/Mannesmann to other mobile operators g iven its unrivalled possibility to provide advanced seamless services crosswise Europe. This reinforces the merged entitys position in the industry as a dominant player.And through its unrivalled large customer base and position, Vodafone/Mannesmann will be in a unique bargaining power against handset manufacturers to treat design functionalities unavailable to competing operators. Customizing handsets make it more difficult for roamers from competing mobile operators to take advantage of the advanced pan-European services available over Vodafones network. Again, competitors lose out if the merger were to be approved.Upon investigation the Authorities revealed that the merged entity would face wicked competition from other operators and will not enjoy a dominant purchasing power in the long run. They agreed that the merged entity will be a strong buyer in the market for mobile handsets and network equipment, but there remain many other comparable incumbents competing in the market . So, the merged entity would not achieve the necessary buying power to become dominant on the market.In the light of the above the authorities reason out, the notified transaction does not lead to the creation or strengthening of a dominant position in the global markets for mobile handset and mobile network equipment as a result of which effective competition would be significant impeded in those markets. Meaning to say, the authorities do not view the merger as a significant threat since its powers would have been neutralized by other relevant competitors within the industry.Further precautions were interpreted in ensuring fair competition within the industry as seen in the d turn upr of Orange with Mannesmann. This move aims at diluting the powers of Vodafone and Mannesmann after the approval of their merger. It is a well-received decision as it removes the competitive overlaps in the united Kingdom and Belgian markets of telecommunication services.Besides Vodafone has, on it s own account, pledged to enable third party non-discriminatory access to the merger entitys integrated network that includes undertakings which cover exclusive roaming agreements, third parties access to roaming arrangements, third parties access to wholesale arrangements, standards and SIM-cards and a set of implementing measures aimed at ensuring their effectiveness. On top of that, it has proposed to set up a fast cut dispute resolution procedure in order to solve disagreements in the mentioned aspects and also to reduce its anticompetitive stance. The undertakings as well as demerger is thought to be justifiable since it eliminates the competition concerns linked to the inability of third parties to provide similar competitive seamless pan-European mobile services.CONCLUSIONIn conclusion, Vodafones proposal to merge with Mannesmann is seen as an anticompetitive threat to other telecommunication service provider. Rival firms were concerned that the merger would bestow substanti al market power to the merged entity. Thus, they were strongly against the merger proposal. However, after much consideration by the competition authorities, they concluded that the merger would not inflict much threat due to the social movement of a number of strong, large and powerful buyers in the market which bar Vodafone/Mannesmann from achieving dominant position on the cooking of the related services. Moreover, the demerger of Orange with Mannesmann will erode market power of the merged entity. Furthermore, Vodafone submit undertakings that allow third parties access to its networks. Following the implementation of these undertakings, third parties will be in a position to offer competing advanced pan-European mobile services which also prevent the emergence of a dominant position on the provision of these services. The possibility to offer similar services in competition with Vodafone will, in turn, also develop incentives for third parties to develop competing networks. Therefore, the authorities approved of the merger between Vodafone and Mannesmann.To some extent, I disagree that the merger should be approved. The authorities argument that the presence of comparable incumbents will be sufficient in reducing market power of the merged entity comes across as weak to me. Only few of such incumbents operate within the telecommunication industry. Thus, its check on the merged entitys market power is almost negligible. Vodafone/Mannesmann could still operate like a monopoly by setting high prices and reducing output while erecting barrier to entry to deter competition. Consumer welfare would be greatly harmed as a result of the merger.On the other hand, I support the merger as it encourages innovations. In todays competitive society, only the strongest emerge as champions. Therefore, rival firms may invest in Research and cultivation (RD) in creating an innovative communicative technology or network frame that gives it a competitive edge over Vodaf one/Mannesmann existing resources. This encourages a innovative competitive that benefits society as a whole. Producers gain as it may develop ideas to increase efficiency while consumers may gain from by chance cheaper pricing that is passed on to them from lower production cost incurred by producers.APPENDICESEuropean Competition Commission, http//ec.europa.eu/competition/mergers/cases/decisions/m1795_en.pdf, assessed on 11 November 2010Kendall (2010), Markets, Competition and Regulation language Notes Session 8 Mergers and Session 9 Competition PolicyMerger Control and Remedies Policy in the E.U and U.S the case of Telecommunications Mergers, http//www.cerna.ensmp.fr/Documents/GLB-TelecomMergerRemedies.pdf, assessed on 12 November 2010United Kingdom Competition Commission, http//www.competition-commission.org.uk/rep_pub/reports/2003/475mobilephones.htmfull, accessed on 15 November 2010Europa Press Release quick Commission clears merger between Vodafone Airtouch and Mannesmann AG with conditions, http//europa.eu/rapid/pressReleasesAction.do?reference=IP/00/373http//news.bbc.co.uk/2/hi/business/630166.stm, assessed on 16 November 2010