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?
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.