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How the efficiency may increase if two firms merge? |
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Answer» Solution :(i) Suppose that initially there are two firms in an industry and both are same but inefficient. (ii) Their MC curves are at a high level and consequently they charge a higher price and produce less. (iii) They realize, however, that if they merge with each other - and thereby become a monopoly-they can reduce their cost. (iv) For instance, one FIRM may have excellent technical MANPOWER but may not have good marketing SKILLS, whereas the other may not have good technical manpower but possesses superior marketing knowledge by merging the resulting monopoly firms MC CURVE will be at a lower level and thus it will be more efficient firm. (v) This, by itself will induce the monopoly to charge a price which is less and produce a quantity which is greater than when both firms were competing with each other. |
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