A vertical merger is the joining of two companies that are at different levels of the same industry supply chain. It refers to the consolidation of companies that make products or services at different stages of production or distribution within the same industry. For example, a manufacturer might acquire a company that supplies them with parts. It is different from a horizontal merger which would combine two similar businesses at the same stage of production.

Vertical mergers bring together two companies that were formerly independent in order to create a larger, more competitive entity. The goal of this type of merger is to exploit the efficiencies and competitive advantages that can be gained from a close working relationship with another business that is either a supplier or a buyer.

The primary benefits of a vertical merger are increased market power, improved control of the supply chain process, larger economies of scale, improved cost control and efficiency, and improved access to technology, research and development. Additionally, in certain industries, the reduction of market competition through a vertical merger may bring cost savings that allow the companies involved to pass the savings on to customers in the forms of lower prices.

At the same time, a potential drawback of vertical mergers is that they can lead to anti-trust violations as the new entity is in a position to exercise monopoly power and control the market. Because of this, the U.S. Department of Justice and Federal Trade Commission closely scrutinize them, looking to ensure that the proposed merger will not substantially lessen competition or lead to higher prices for consumers.

In conclusion, a vertical merger involves joining two companies within the same industry at different levels of production within the supply chain. This type of merger can result in increased market power, economies of scale, access to technology, as well as cost savings that are passed on to the customers, which ultimately makes the entities involved more competitive and profitable. However, it can also create anti-trust issues and must be carefully analyzed and evaluated to ensure that it will not lead to market dominance and the reduction of competition.