UK Mergers - Economics Help

UK Merger Policy

Any potential merger must give details to the OFT. If the OFT is concerned they can refer the merger to the competition commission which can examine whether the merger is in the public interest

The competition commission can either

block the merger
Allow the merger to occur
Allow it to occur under certain condition such as divesting some parts of the business to keep market share low

Disadvantages of Mergers:

If a merger leads to a significant increase in market share, either in local or national markets, the new firm could exercise monopoly power. The legal definition of a monopoly is a firm with more than 25% of the market. If the firm has monopoly power there could be the following disadvantages:

Higher prices leading to allocative inefficiency)
Lower Quantity and reduction in consumer surplus
Monopolies are more likely to be productively inefficient and not produce on the lowest point on the average cost curve
Easier to collude
If there is less competition complacency amongst firms can lead to lower quality of products and less investment in new products
Fewer firms therefore less choice for consumers
With increased supernormal profits the firm can engage in cross subsidisation or predatory pricing increasing Barriers to Entry.
The new firm can pay lower prices to suppliers
Mergers can lead to job losses.
If the firm becomes too big it may suffer from diseconomies of scale
The motives for mergers is often poor. E.g. managers may prefer to work for a big company where they get higher salaries and more prestige.