3.1.3

Question 1

Reasons for demergers

Answer 1

• Sometimes demergers are required by governments, e.g. on the direction of the Competition and Markets Authority (CMA), because the business is seen to be acting against
  the public interest (reduces competition and therefore choice for consumers)
• firm is experiencing diseconomies of scale and therefore needs to reduce rising LR average costs
• allow each new smaller firm to focus on a specific market and make more profit than they did as part of a larger firm so shareholder value increases and econ of scale increases

Question 2

Check CGP page 56 for demerger details

Answer 2

DO IT P56

Question 3

Effects of demergers on businesses

Answer 3

• loss of market share = less control in the market so less monopoly power
• business is less profitable by this or it may become more profitable is demerger makes it more efficient (drops inefficient arms of the business making a loss)

Question 4

Effects of demergers on workers

Answer 4

• workers may lose their jobs following a demerger. If each firm becomes more efficiently run as a result of the demerger, them some job losses are likely
• improvment in manager employee relations as smaller demerged firm has fewer employees
• workers lose morale if they arent kept up to date in demerger sitch
• Workers may benefit or lose out following a demerger. Senior managers may gain promotion

Question 5

Effects of demerger on consumers

Answer 5

• But the intended long-term effect, if it has been instigated by the government, is to create more competition in the market and therefore lower prices and more choice for the consumer.
• consumer is less confused about what a company does
• smaller firms can better focus on consumer needs