Friday, September 23, 2011

Benefits of Mergers

1. Economies of scale. This occurs when a larger firm with increased output can reduce average costs. Different economies of scale include:
  • i) technical economies if the firm has significant fixed costs then the new larger firm would have lower average costs
  • ii) bulk buying – discount for buying large quantities of raw materials
  • iii) financial – better rate of interest for large company
  • iv) Organizational – one head office rather than two is more efficient

Note: A vertical merger would have less potential economies of scale than a horizontal merger e.g. a vertical merger could not benefit from technical economies of scale

2. International Competition. Mergers can help firms deal with the threat of multinationals and compete on an international scale

3. Mergers may allow greater investment in R&D This is because the new firm will have more profit. This can lead to a better quality of goods for consumers

4. Greater Efficiency. Redundancies can be merited if they can be employed more efficiently


The desirability of a merger will depend upon several factors such as:

1. Is there scope for economies of scale
2. Will there be an increase in monopoly power and significant reduction in competition
3. Is the market still contestable (freedom of entry and exit)


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