Impacts of Mergers on Firms and Consumers

1002 Words5 Pages
A merger occurs when two firm directors and shareholders agree to combine under one board of directors. A horizontal mergers refers to the merging of two firms involved in the same stage of production and combining their goods and services. Firms usually merge for five different motives. The cost motive describes the decrease in cost of production due to increased efficiency when economies of scale occurs. The increase in the range of products diversifies the risk firms face, and may also widen their consumer base and increase market power. Moreover, this can potentially increase the profit firms receive, and because of the above reasons managers may choose to initiate a merger to receive raised bonuses or increase promotion prospectives. A merger can have a multitude of impacts on both consumers and firms. Economies of scale may occur when BA and Iberia airlines merge and the resources of two firms combine, and as the scale of production rises, long run average cost per unit falls. Firms are likely to gain more profit either by lowering the price to attract more quantity demanded, or by increasing the profit margin of each unit simply by retaining the price. Profit is the major contributor to a firm’s investment, and increased profits increases funding for investment. It provides the means by which airlines can invest in new airplanes, safety measures and check-in facilities etc. Investment could shift LRAS to the right by increasing a firm’s spare capacity through technological advancement or training of labour. By increasing the quality of labour and service through research and development, both firms and consumers benefit from increased efficiency and quality. Investment is important for firms in order to be able to maintain competitiveness in the long run, and can not only ensure the survival of airlines during economic hardships, but also retain
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