Question

What changes in market structure brought about by a merger are said to affect the potential for coordination, and in what way?

a) Coordination is easier with ( 1 - fewer; 2 - more )  firms, as it is easier to attribute a change in the market price to deviation of a particular firm (more transparency and easier monitoring). With a large number of firms, the chance that one of them will deviate is ( 1 - smaller; 2 - bigger ) .

b) In addition, it is easier to coordinate when firms are ( 1 - asymmetric; 2 - symmetric ) , making it easier for each firm to understand others’ actions.

Hence, a merger can ( 1 - facilitate; 2 - obstruct )  collusion not just by reducing the number of firms, but also by making them more similar, e.g. eliminating a ‘maverick’ firm.

c) Those similarities may be also in terms of diversification and integration. Integrated and diversified firms have ( 1 - more; 2 - less )  potential to retaliate, e.g. they can retaliate in market B to a deviation in market A.

d) Finally, free entry can ( 1 - facilitate; 2 - destabilize )  collusion, by creating temptation to deviate to gain business with the newly entered firm.

Answer 1

a) Coordination is easier with fewer firms

With a large number of firms, the chance that one of them will deviate is bigger

b) In addition, it is easier to coordinate when firms are symmetric making it easier for each firm to understand others’ actions.

Hence, a merger can obstruct collusion not just by reducing the number of firms

c)those similarities may be also in terms of diversification and integration. Integrated and diversified firms have more potential to retaliate.

d) Finally, free entry can destabilize collusion, by creating temptation to deviate to gain business with the newly entered firm.