A LEVEL ECONOMICS
NOTES
Evaluate the benefits of conglomerate integration
Point 1: Diversify risk
Conglomerate integration allows a firm to diversify their risk=
If there is a downturn in one industry it will not be as fatal to the merged firm=
For example, before Covid, Virgin media integrated with Virgin airline and when covid hit there was a
significant reduction in the demand for airlines (restrictions in travelling via plane disrupted plane
travel)=
Sales in Virgin’s airline business took a hit and decreased significantly=
However, sales rose for Virgin Media due to increased television viewing in lockdown=
Thus, due to conglomerate integration, virgin media can use its profits to cross-subsidise virgin
airlines=
Therefore, this could keep Virgin Airlines from shutting down and could come back after covid with
significant market share as other firms in the industry had to shut down during covid=
(Could include regular cost/revenue diagram showing a profit area for Virgin Airlines and label this as
in the long-term after the problems of Covid faded away)
Evaluation Point 1: Problems with cross-subsidising
However, instead of diversifying risk, conglomerate integration may increase risk and exposure=
Virgin media using its supernormal profits to keep virgin airlines afloat creates problems for virgin
media=
Virgin media will not be able to use the profits to reinvest back into R&D and new capital=
Therefore, virgin media can no longer be dynamically efficient and may fall behind its competitors=
NOTES
Evaluate the benefits of conglomerate integration
Point 1: Diversify risk
Conglomerate integration allows a firm to diversify their risk=
If there is a downturn in one industry it will not be as fatal to the merged firm=
For example, before Covid, Virgin media integrated with Virgin airline and when covid hit there was a
significant reduction in the demand for airlines (restrictions in travelling via plane disrupted plane
travel)=
Sales in Virgin’s airline business took a hit and decreased significantly=
However, sales rose for Virgin Media due to increased television viewing in lockdown=
Thus, due to conglomerate integration, virgin media can use its profits to cross-subsidise virgin
airlines=
Therefore, this could keep Virgin Airlines from shutting down and could come back after covid with
significant market share as other firms in the industry had to shut down during covid=
(Could include regular cost/revenue diagram showing a profit area for Virgin Airlines and label this as
in the long-term after the problems of Covid faded away)
Evaluation Point 1: Problems with cross-subsidising
However, instead of diversifying risk, conglomerate integration may increase risk and exposure=
Virgin media using its supernormal profits to keep virgin airlines afloat creates problems for virgin
media=
Virgin media will not be able to use the profits to reinvest back into R&D and new capital=
Therefore, virgin media can no longer be dynamically efficient and may fall behind its competitors=
