In 1989, the Detroit Free Press and Detroit Daily News obtained permission to merge under a special exemption from the antitrust laws. The merged firm continued to public the two newspapers but was operated as a single entity.
A) Before the merger, each of the separate newspapers was losing about $10 million per year. What forecast would you make for the merged firms' projects? Explain.
B) Before the merger, each newspaper cut advertising rates substantially. What explanation might there be for such a strategy? After the merger, what prediction would you make about advertising rates?© BrainMass Inc. brainmass.com October 25, 2018, 5:25 am ad1c9bdddf
a) The merged firm would most likely be profitable, or the two firms would not want to merge. The two independent newspapers were probably suffering from diseconomies of scale because each firm had to incur substantial costs to ...
This solution contextualizes diseconomies of scale.
Managerial Economics: Mergers and Market Equilibrium
In 1989, the Detroit Free Press and Detroit Daily News (the only daily newspapers in the city) obtained permission to merge under a special exemption from the antitrust laws. The merged firm continued to publish the two newspapers but was operated as a single entity.
a. Before the merger, each of the separate newspapers was losing about $10 million per year. What forecast would you make for the merged firm's profits? Explain.
b. Before the merger, each newspaper cut advertising rates substantially. What explanation might there be for such a strategy? After the merger, what prediction would you make about advertising rates?
Samuelson and Marks, Discussion Question, p. 314.
Over the last 30 year in the US, the real price of a college education (i.e. after adjusting for inflation) has increased by almost 70 percent. Over the same period, an increasing number of high school graduates have sought a college education. (Nationwide college enrollments almost doubled over this period.) While faculty salaries have barely kept pace with inflation, administrative staffing (and expenditures) and capital costs have increased significantly. In addition, government support to universities (particularly research funding) has been cut.
a. College enrollments increased at the same time that average tuition rose dramatically. Does this contradict the law of downward-sloping demand? Explain briefly.
b. Use supply and demand curves (or shifts therein) to explain the dramatic rise in the price of a college education
Samuelson and Marks, Discussion Question, P. 268.
Explain why the cost structure associated with many kinds of information goods and services might imply a market supplied by a small number of large firms. (At the same time, one internet business such as grocery home deliveries have continually suffered steep losses regardless of scale. Explain why.) Could lower transaction costs in e-commerce ever make it easier for small suppliers to compete? As noted in Chapter 3, network externalities are often an important aspect of demand for information goods and services. (The benefits to customers of using software, participating in electronic markets, or using instant messaging increase with the number of other users.) How might network externalities affect firm operating strategies (pricing, output, and advertising) and firm size?
Samuelson & Marks, number #4, page 264
The last decade has witnessed an unprecedented number of mega-mergers in the banking industry: Bank of America's acquisitions of Fleet Bank, MBNA, and U.S. Trust; Bank of New York's acquisition of Mellon Financial; and Wells Fargo's acquisition of Wachovia, to name several of the largest consolidations. Besides growth for its own sake, these superbanks are able to offer one-stop shopping for financial services: everything from savings accounts to home mortgages, investment account, insurance vehicles, and financial planning.
a. In the short run, what are the potential cost advantages of these mergers? Explain.
b. Is a $300 billion national bank likely to be more efficient than a $30 billion regional bank or a $3 billion state-based bank? What economic evidence is needed to determine whether there are long-run increasing returns to scale in banking?
c. Do you think these mergers are predicated on economies of scope?
Managerial Economics 7th Edition. John Wiley & Sons, Inc.
William F. Samuelson & Stephen G. Marks. (2012).