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When deciding on mergers, what do policy makers consider?

What are the circumstances that would make the government oppose a merger of two firms?

Consider the following...
What is a merger and what are some different types of mergers?
How do mergers affect market structure and performance?
Do mergers affect market power?
Can they lead to market failure?
Do policy makers consider market concentration when deciding on mergers?
What is market concentration?
Is it important to take into consideration whether the market (in which the proposed merger will take place) is characterized by high barriers or low to entry?

Solution Preview

Mergers occur when a two or more firms are consolidated into a single firm. These can be vertical (upstream firm merges with downstream) or horizontal (direct competitors merge). Mergers are important from a policy perspective because they alter the structure of markets and may affect market performance by giving firms market power. Recall that in perfect competition firms do not have market power. This competition among firms leads to efficient outcomes given no other types of market failures (public goods, externalities, etc).

So one reason markets fail is market power and market structure can affect market power. While all firms seek to maximize profit those with market power will do so by producing less output at ...

Solution Summary

In the following solution I provide a discussion on the topic of mergers from the policy makers perspective. I begin by defining what a merger is and different types of mergers. I then consider the effects that mergers can have on market structure and give an overview of how market structure can determine market performance and in some cases, when firms have too much power, market failures. Next I discuss the different mechanisms by which policy makers determine the level of concentration in a market. Finally, I discuss the importance of market barriers to entry in making merger decisions.

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