ChainWhat it assumes · how to break it
Start
Two of the largest firms in an oligopoly merge, for example two supermarket chains or two mobile networks.
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, it can raise price above the level the two firms charged when they competed, and with fewer rivals left, tacit collusion becomes easier.
price maker · tacit collusion
price maker · tacit collusion
Best link to attack
Assumes: Cost savings from the merger are small.
Assumes: Cost savings from the merger are small.
But: If the merger brings large economies of scale, such as bulk buying from suppliers, lower MC may lead the profit-maximising firm to cut price despite its extra market power.
End
Prices are likely to rise because competition between the merging firms is lost.
Evaluation chain
- E1However, the price effect depends on whether the cost savings from the merger outweigh the gain in market power.
- E2If the merged firm gains purchasing economies and cuts duplicated costs such as head offices, then its marginal cost falls.
- E3As a result, the profit-maximising price where MC = MR can fall even though the firm faces less competition.
- E4So a merger may lower prices where cost savings are large and remaining rivals are strong, and raise them where it removes a close competitor with few savings; this is the trade-off the CMA weighs.
Another way to attack it: Powerful buyers, such as large business customers, and the threat of investigation by the CMA may restrain the merged firm's pricing.
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Questions this answers
- Assess the likely impact of a merger between two large supermarkets on prices.
- Explain how a horizontal merger can increase market power.
- Discuss whether horizontal mergers are always against the interests of consumers.
Diagram
Draw the merged firm's AR and MR becoming steeper (less elastic), with price rising at the new MC = MR output. For the evaluation, use the Williamson trade-off diagram: price rises but AC falls, so compare the deadweight loss triangle with the cost-saving rectangle.
Reverse and related
Demerger or entry of a new rival → more competition, more elastic demand and lower prices.