Exam q Short

Question 2

Evaluate the microeconomic effects of mergers in a market of your choice (25)

Answer 2

1. Productive Efficiency

Merger → larger scale → easier to exploit economies of scale (EOS)
→ EOS = falling LRAC as output ↑
→ Purchasing EOS → bulk-buy tyres, engines, steel
→ Operate closer to MES → ↓ costs → ↑ productive efficiency
→ Lower costs → passed to consumers → ↑ allocative efficiency

EVAL:
Risk of X-inefficiency → less competitive pressure → ↓ incentive to cut costs
→ Firm may drift from point A (minimum LRAC) to B (higher cost on LRAC curve)

2. Dynamic Efficiency
   Merged firm = larger customer base → MR & AR shift out
   → ↑ sales Q1→Q2, ↑ price R1→R2
   → Profit ↑ (R1ABC1 to R2DEC2)
   → Extra profit → reinvested in R&D (e.g. electric/self-driving cars)
   → Long-term innovation → ↑ dynamic efficiency

EVAL:
Greater dominance → may exploit consumers
→ Fewer firms → ↓ choice → market power ↑
→ PED ↓ (more inelastic) → firms can ↑ price → demand ↓ less than proportionately
→ Profits ↑ but → ↓ allocative efficiency & ↓ consumer surplus