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merge the businesses

Among the roadside stores of a middle class suburb, there used to be two drugstores, approximately the same size. One was on the side of the main road where traffic was the busiest in the morning; the other was on the opposite side of the road. They were about 50 meters apart. After many years of competing, the two businesses were merged and the shop on the busy-morning side of the road was shut down. Why did the owners of these businesses decide to do this? Could this decision be explained by the concept of economies of scale?'

(a) A list of reasons (based on micro economic theory) why the owners decided to merge the businesses (or close one and retain the other). The reasons should centre around costs structures such as average, fixed, variable and total costs and other relevant factors

(b) Arguments for and against whether the merge decision could be explained by the concept of economies of scale.

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Part A:

A list of reasons (based on micro economic theory) why the owners decided to merge the businesses (or close one and retain the other). The reasons should centre around costs structures such as average, fixed, variable and total costs and other relevant factors.

Solution:

When the two businesses were operating on a standalone basis, they were competing with each other in the marketplace. Thus, they were both sharing the revenues from the sale of pharmaceutical products in the local marketplace. The primary reason for merging the two businesses or in other words, closing one store and retaining the other was to combine the sales and revenues of the two individual businesses and take advantage of numerous factors arising out of increase in revenue, profitability and size of the business. In other words, the firms merged together to enjoy numerous advantages which arises due to the large scale operations of the combined entity, as outlined below.

First of all, the merged entity, which was certainly much larger in terms of size, revenue and operations than the standalone entities, created a sort of monopoly for the drugstore in the area as consolidation in number of players took place. Even though details about the number of other drugstores in the area is not provided, it may be presumed that these two drugstores were the leading drugsellers on the road and by merging together, they offer no choice to the customer but to buy the drugs from them. The merger provided the company greater control over the pricing of the products in the local area and also created barriers to entry for ...

Solution Summary

A list of reasons (based on micro economic theory) why the owners decided to merge the businesses (or close one and retain the other). The reasons should centre around costs structures such as average, fixed, variable and total costs and other relevant factors.

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