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.