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Firms engage in mergers and takeovers in an attempt to manage the level of competition they face. From the firm’s perspective, mergers and takeovers lead to a number of benefits including:
• economies of scale – mergers allow firms to avail of greater economies of scale which will reduce costs and all other things being equal increase profit margins
• diversification and risk spreading – mergers also allow firms to diversify their output or increase their geographical coverage both of which help to spread risk
• market power – mergers, particularly horizontal mergers, increase the firms’ market share and therefore increases their power to influence price
• sharing of specialist knowledge
• potential for synergies
• increased profit and potential for research and development. Some economists argue that as long as the merged firms face some competition or indeed the potential for competition then these benefits will be passed on to consumers in the form of lower prices, greater choice, increased availability and higher quality goods.
Other economists, however, argue that because mergers increase the power of firms none of the above benefits will be passed on to consumers. Indeed, they argue that consumers are likely to be worse off as a result of the merger as firms often increase prices and reduce the range of products sold after the merger. There is therefore a sound economic case for outlawing merger activity which is likely to act against the public interest by significantly reducing the level of competition.
marlinbito answered the question on July 8, 2018 at 17:15
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