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Dynamic: A merge could lead to an improvement in dynamic efficiency since they are earning more
profit and can increase the rate of investment in research & development, training employees and
investment in human capital. This could lead to the development of new products and services; thus
increasing choice in the market and leading to dynamic efficiency gains.
Evaluation: Due to the increase in cost of the merger initially, the firm may cut spending on research
& development and human capital. Also, firms may be uncertain about the future of the company due
to the unstable grounds of a merger and so are likely to be wary about spending on research &
Productive: A merge between two firms is likely to result in greater output and thus be able to
decrease LRAC through strategies such as bulk buying. This allows them to become more
productively efficient by operating at or closer to AC=MC.
Allocative: This is because the firm is able to produce a mix of goods using scarce resources in such a
way to meet the demands of consumers and the price is equal to MC.
Evaluation: However, the increase in market power for the firm may lead to the firm increasing
prices by operating where MC=MR (maximising profits) and so charge higher than the allocatively
Dynamic Efficiency: Greater profits from the merger could be used to re-invest into the business.
This could lead to an increase in spending on research and development and thus, an increase in new
products available in the market and to the consumer.
Evaluation: However, as there is less competition, the firm has less incentive to innovate and
produce new products. Instead, it is likely that the firm would choose to give higher dividends to
shareholders to meet the shareholder objective otherwise the market value of the firm could
decrease if shareholders leave. This means that there is less choice for consumers.
Economies of Scale: The firm would benefit from economies of scale which will reduce LRAC for and
so they are able to lower prices to consumers as they become productively efficient; thus increasing
consumer surplus and overall consumer welfare. Furthermore, large firms would be able to
cross-subsidise and so consumers in other markets may continue to receive services.
Evaluation: However, initial costs of the merger are most likely to lead to diseconomies of scale due
to problems of communication, co-ordination and control. Therefore, consumers may end up having
to bear the costs as the firm will simply pass them on. It could also mean less choice of goods due to
fewer firms in the market.
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Firms Economies of scale
Technical: The firm will benefit from technical economies of scale since they will be gaining the
machinery and human capital from the other. This means that they are able to produce more output
with lower average costs but also benefit from division of labour due to the increase in employees.
Managerial: A merge between two firms allows them to hire specialists in different fields and is
therefore able to increase productivity.…read more