Question

Which of the following is true about horizontal mergers? (a) Mergers between firms that produce substitute products will always lead to higher prices for consumers unless there are cost efficiencies realized from the merger (b) Mergers between firms that produce complementary products are viewed favorably because they lead to lower prices for consumers even without cost efficiencies being realized (c) Mergers between firms that produce substitute products may lead to higher or lower prices for consumers if there are cost efficiencies realized from the merger (d) All of the above

Answer 1

Solution:- The correct answer (c) that is mergers between the firms that produces substitute products may lead to higher or lower prices for consumersif there are cost effeciencies realized from mergers.

Horizontal merger is meregr that arises between the firms that produces similar products. The impact of mergers on may be positive or negative on the consumers. It has two different effects-

1. Mergers reduces competition between the merging firms and thus allows them to charge higher prices

2. On the hand, it can also enables the firm to develop economies of scale, which reduces cost of production and allows them to charge lower price.