Evaluate the view that mergers always result in a lessening of competition

IntroductionDefine mergers: combining of two firms in the same industry in either the same or different points of the production process, resulting in one larger firm.Key points:For:Economies of scale. Larger firms are likely to experience economies of scale, as their output level increases, this allows them to operate on a lower point on the long run average cost curve. Firms with lower costs are able to charge lower prices, making it difficult for other firms in the market to compete, as they face higher costs of production and therefore have to charge higher prices. Consumers will prefer the lower prices offered by the merged firm, decreasing the demand for competing firms. With reduced demand faced by competing firms, they will not be able to cover their costs of production, and will shut down in the long run, thereby lessening competition. Larger market share. Mergers lead to a single firm having larger market share. Higher market share is likely to lead to increased barriers to entry, as new entrant firms cannot compete against the lower cost advantages faced by firms with larger market share. Higher barriers to entry deters new firms from entering the market, therefore reducing competition. Moreover, a single firm with large market share leaves less remaining space for more, smaller firms, leading to less competition.Against:Global Market. If the market is on an international scale, a merger firm may have little to no impact on overall level of competition. The increased size of the merged firm may be incomparable to the size of the overall international market, thus, economies of scale and larger market share are not large enough factors to lessen competition.Contestability. If the merged firm is operating in a contestable market, this means that it will act competitively regardless of its large size and market share, due to the threat of new entrant firms competing away their supernormal profits. If the market is contestable, then a merger is unlikely to result in less competition.Non-price competition. Economies of scale and larger market share may only be of benefit to merged firms if they are operating in a market that competes on price. In a market where products are differentiated, the lower long run average costs of the merged firm might not affect competing firms in the market, as they can be non-price competitive.Evaluation:Mergers resulting in less competition depends upon:Success of merger. Mergers do not always lead to economies of scale. If the combined firm is too large, it can face diseconomies of scale, with higher costs of production. For example, it may be difficult for the merged firm to integrate work systems, management and working culture. If there are diseconomies of scale, competition will not be lessened.Size of the firms merging. The combined market share of the merging firms may not be large enough to negatively impact competition.Role of Competition Markets Authority. An outside body which deals with firm behaviour may input regulations on merging firms in order to promote competition.Conclusion:Mergers can lead to a lessening of competition as a result of economies of scale, larger market share and barriers to entry. However, this is not always the case, with the context of the market in which the firm is operating being important in determining how much competition is affected.