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Merger of Two Firms and its Impact on Product Price

Discuss whether a merger of two firms in the same industry will be likely to reduce the price of the product.

Category:

Market Structures and Competition

Frequently asked question

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Answer

Understand the essay prompt or question thoroughly before you begin.

A merger of two firms in the same industry can have various effects on the price of the product. Let's analyze both sides of the argument:
Why it might reduce the price:
➡️1. Economies of Scale: A horizontal merger may allow the combined firm to benefit from economies of scale -. By consolidating operations and reducing duplicate resources, the firm can achieve lower average costs -. This cost advantage can enable the firm to lower prices while maintaining or increasing profits -. Additionally, the firm may pass on the cost savings to consumers, resulting in reduced prices -.
➡️2. Rationalization of Operations: The merger may allow the firm to streamline its operations and eliminate duplication -. By removing redundant processes and reducing inefficiencies, the firm can lower its overall costs -. This cost reduction may enable the firm to offer the product at a lower price -.
Why it might not reduce the price:
➡️1. Diseconomies of Scale: Despite the potential for economies of scale, a merger can also lead to diseconomies of scale -. For example, the integration of two firms may result in challenges related to coordination, communication, and increased bureaucracy -. These inefficiencies can lead to higher average costs -, which may negate any potential price reductions.
➡️2. Increased Market Power: A merger can increase the market share and market power of the combined firm -. With a larger market presence, the firm may have more control over pricing decisions -. In some cases, the firm may become a price maker and face reduced competition -. This reduced competition and increased market power can result in higher prices rather than lower prices -.
It's important to note that the impact of a merger on prices can vary depending on market conditions, industry structure, and the specific circumstances of the merger. Other factors such as regulatory oversight, customer demand, and the potential for innovation should also be considered.
In conclusion, while a merger of two firms in the same industry has the potential to reduce the price of the product, it is not guaranteed. The realization of cost efficiencies, economies of scale, and the intention of the merged firm to pass on savings to consumers can lead to lower prices. However, the presence of diseconomies of scale and increased market power may result in higher prices. Each merger case should be evaluated based on its specific circumstances to determine its potential impact on prices.

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I. 🍃Introduction
- Definition of horizontal merger
- Importance of understanding the potential benefits and drawbacks

II. Reasons why a horizontal merger might be beneficial
- Economies of scale
- Example ➡️1
- Example ➡️2
- Lower average costs
- Ability to lower prices
- Maintain/increase profit
- Pass on savings
- Rationalisation
- Cutting out duplication

III. Reasons why a horizontal merger might not be beneficial
- Diseconomies of scale
- Example ➡️1
- Example ➡️2
- Increased market share/power
- Becoming a price maker
- Reducing competition
- Making demand price-inelastic
- Potential for prices to rise rather than fall

IV. 👉Conclusion
- Summary of key points
- Importance of carefully considering the potential benefits and drawbacks before pursuing a horizontal merger.

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Up to ➡️5 marks for why it might: A horizontal merger may allow the firm to enjoy economies of scale - example/s (➡️2) lower average costs - enabling the firm to lower prices and maintain/increase profit / pass on savings -. A horizontal merger may allow a firm to rationalise - to cut out duplication -.
Up to ➡️5 marks for why it might not: A merger may result in a firm experiencing diseconomies of scale - example/s (➡️2) higher average costs -. A merger may increase market share / power / firm becomes a price maker - reducing competition - making demand price-inelastic - prices may rise rather than fall -.

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