Question

Write an essay on how merger could be implemented in an oligopolistic market to reduce competition.

Answer 1

Suppose two competing firms in the market merge, the competition between the merged firms has been eliminated and the competitive pressure reduced as a consequence of the reduced number of firms in the market, the price increases, quantity is reduced, and thus a loss in welfare is to be expected.

A merger among competitors also extinguishes any competitive constraint between the merged entities. The significance of this could be dire if the parties to the merger operate in an oligopoly market and possess high market share in the pre-merger market. The merged firms in the post merger market would increase the prices unilaterally without any regard for their remaining competitors or customers.