ChainWhat it assumes · how to break it
Start
Two of the largest firms in a market merge, for example two supermarket chains that compete for the same shoppers.
1
As a result, the number of major firms falls and the market becomes more concentrated, so the merged firm has a larger market share.
horizontal integration · concentration ratio
horizontal integration · concentration ratio
Assumes: The merging firms were close competitors.
But: If the firms served different areas or customer groups, the merger removes little competition.
2
This means the merged firm faces fewer close rivals, so demand for its products becomes less price elastic.
market power · PED
market power · PED
Assumes: Customers cannot easily switch to other firms.
But: If remaining rivals and discounters have spare capacity and switching is easy, customers move when the merged firm raises price.
3
Therefore, the merged firm can raise prices, so consumer surplus falls.
consumer surplus
consumer surplus
Assumes: Cost savings from the merger are not passed on to consumers.
But: If strong rivals remain, the merged firm may have to pass on cost savings as lower prices to keep its customers.
4
In addition, consumers have fewer brands and outlets to choose from, and with less pressure to compete the firm may let quality, range or service slip, for example by closing nearby stores.
consumer choice · quality
consumer choice · quality
Best link to attack
Assumes: Consumers have no strong alternatives after the merger.
Assumes: Consumers have no strong alternatives after the merger.
But: If remaining rivals, discounters and online sellers are close substitutes and switching is easy, the merged firm loses customers when it cuts quality.
End
Consumers face higher prices, lower consumer surplus and less choice, and quality may fall.
Evaluation chain
- E1However, the loss of choice depends on whether consumers still have strong alternatives after the merger.
- E2When remaining rivals, including discounters and online sellers, are close substitutes and switching is easy, the merged firm loses customers if it raises price or cuts quality.
- E3As a result, competitive pressure on price, choice and quality survives the merger.
- E4So consumers lose most where the merging firms were each other's closest rivals; this was the CMA's concern when it blocked the Sainsbury's–Asda merger in 2019, expecting higher prices and lower quality and choice for shoppers.
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Questions this answers
- Assess the likely impact of a merger between two supermarket chains on consumers.
- Explain how a horizontal merger can reduce consumer choice.
- Evaluate the case for preventing mergers between large firms.
Diagram
Diagram of the merged firm with AR becoming less elastic: price rises and output falls, shrinking the consumer surplus triangle under AR and above price.
Reverse and related
Entry of a new rival or a blocked merger → more choice, lower prices and more pressure on quality.