Answer to Question #97484 in Microeconomics for bai kamara

Question #97484
whait s merger paradox
Expert's answer

According to the Merger’s Paradox, the merger is profitable only when it enjoys the largest share of power in the market or becomes a monopoly. The paradox is related to the Horizontal mergers with the same quality of product and similar prices but which compete in quantities, as observed while solving Cournot competition. When firms merge, the merged firms realize that the price of the product produced is also dependent on the quantity produced due to which the quantity supplied by the Merger decreases, which increases the price of the product in the market. However, theories and other pieces of evidence show, that even after the rise in prices, the profits of the merger decreases as compared to the sum of the individual profits of the merged firms. The firms which do not merge can acquire more profits, due to the rise in prices and no change in output produced. This shows that without incurring any costs or the advantages of a market, it is unprofitable for the merged firms to produce as a merger unless all the firms can form a merger and form a monopoly in the market.

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