Often, the incentive for the acquisition or merger of competitive

Question

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Passage # 160 Date: 19-Jun-2020
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Often, the incentive for the acquisition or merger of competitive enterprises producing similar products was to gain more effective control of output, price, and markets. Such horizontal combination increased organizational capabilities only if a single, centralized administrative control was established over the acquired companies, and then the facilities and personnel were rationalized to exploit the economies of scale and scope. If the administrations of the companies acquired were not centralized, but operated autonomously as they had before the change, the enlarged enterprise remained little more than a federation of firms. The resulting cost advantages were minimal.

The motivations behind vertical integration — that is, growth through obtaining facilities along the chain of production — were more complex. Faster “throughput,” cost reductions, and increased productivity in terms of worker output rarely resulted from vertical integration unless the additional processes were directed to the firm’s existing ones by its own rails or pipes. Such integration was particularly successful in the production of metals and machinery. Where the facilities to make related products were located at a distance, increased “throughput” was less feasible.

The motive for such investments in growth by vertical integration was primarily defensive, but not in the same way as through horizontal combination. Sometimes the aim was to withhold supplies from competitors, thereby creating barriers to entry. More often, however, the motive was to ensure a steady supply of materials into the enterprise’s production, which maintained the cost advantages of scale and scope. It provided insurance against cost increases from fluctuating production, and reduced the cost of inventory storage and other carrying costs. It lowered the risk that suppliers would fail to carry out contractual agreements — risks economists have termed “bounded rationality” (human fallibility) and “opportunism” (self-interest with guile). The greater the investment in capital-intensive facilities and the greater the optimized size of these facilities, the greater the incentive companies have for insurance against cost increases. Thus, the more concentrated the facilities of production and supply, the more likely the integration of the two within a single enterprise.   1 
 C 
 1. According to the passage, a primary motivation for the horizontal combination is

A. investment
B. cost advantage
C. better control over markets
D. increased profitability
E. better control of administration and increased output

2 
 B 
 2. Which of the following correctly describes how the passage is organized?

A. Two business strategies are presented, followed by a criticism of one strategy.
B. One type of business strategy is presented, followed by a second strategy which is deemed the more successful.
C. Two business strategies are presented, followed by a deeper examination of one of the strategies.
D. One business strategy is examined, followed by a deeper examination of this strategy.
E. A discussion of various topics concludes with an unsupported summary.

3 
 D 
 3. According to the passage, which of the following is an example of behavioral risk?

(A) vertical integration and horizontal combination 
(B) executive errors
(C) improper restructuring of labor resources following a merger
(D) fraudulent contracts
(E) withholding supplies from competitors and creating barriers to entry in the industry

Source:  800Score

yashikaaggarwal · Answer

I get the other two RCs. Can you define why the fradulent contracts are categorised under behavioural risks.?
Thanks in advance.

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unraveled · Answer

yashikaaggarwal 
I'm not sure what you meant by two RCs. Your other question is about Q3, right? 
I got first two right and in third i chose E. Before i say anything more here's the OE.

OE:
A1. With choice A, investment is a component of both vertical integration and horizontal combination, but it is not the motivation, as such, for either. Similarly, cost advantage, as given in Choice B, may be a benefit of both, but more or less as a by-product rather than because it is a motivation.
The "increased profitability" in choice D may be the outcome of horizontal combination, but this isn't a specific motivation of one over the other. Choice E is also incorrect. The first paragraph of the passage indicates that, although administrative improvements may result from horizontal combination (provided it is handled in a certain way), administrative improvements are not what motivates horizontal combination.
The first paragraph makes clear that the primary motivating force behind horizontal combination is to give businesses greater control over "output, price, and markets" which indicates the ability to improve market penetration and to better attune output to demand and price to what the market will bear. This makes C correct.
 
A2. The passage contains 3 paragraph!
The first is about the motivations behind horizontal integration, the second introduces the motivations behind vertical integration, and the third goes into detail about these motivations. Therefore, (C) is correct. (A) and (B) indicate bias, and the author does not show a bias towards one strategy over the other. (D) leaves out the presence of a second strategy altogether. (E) is incorrect because the author doesn't conclude with a summary.

A3. In looking at the last paragraph of the statement, you can see the answer: "It lowered the risk that suppliers would fail to carry out contractual agreements -- risks economists have termed "bounded rationality" (human fallibility) and "opportunism" (self-interest)". It is possible that suppliers will make fraudulent contracts, and this represents a risk.

My Post-attempt analysis:
P1: Author talks about horizontal combination with a little apprehension.
P2: Author then takes it to vertical combination again with apprehension.
P3: Then he/she finally compares both combinations and elaborates his/her take on vertical combination. Doing so he/she talks about the possible risks.

As far as Q3 is concerned I was not fully convinced with that OE answer but by POE only D makes sense. Other options are not outright risks as suggested in the passage.

Hope this helpful..!!

Gowtham91 · Answer

SajjadAhmad  Pls post OE for Q3

Sajjad1994 · Answer

Official Explanation

3. According to the passage, which of the following is an example of behavioral risk?

Difficulty Level:   700

Explanation

In looking at the  last paragraph of the statement , you can see the answer:  "It lowered the risk that suppliers would fail to carry out contractual agreements -- risks economists have termed "bounded rationality" (human fallibility) and "opportunism" (self-interest)" . It is possible that suppliers will make fraudulent contracts, and this represents a risk.

Answer: D

0212 · Answer

pls explain the answer of the third question- the behavioral risk one.

bM22 · Answer

Hi 0212 , Kindly refer the following OE: 1. https://gmatclub.com/forum/often-the-in ... l#p2550677 2. https://gmatclub.com/forum/often-the-in ... l#p2491913 Let me know if you still have doubts. Thanks.

Often, the incentive for the acquisition or merger of competitive

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Often, the incentive for the acquisition or merger of competitive

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