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The makers of Fiat cars merged with the makers of Vauxhall cars in 2021 - Edexcel - A-Level Economics A - Question 5 - 2022 - Paper 1
Question 5
The makers of Fiat cars merged with the makers of Vauxhall cars in 2021. Fiat management had aggressively sought a merger to achieve economies of scale. The competit... show full transcript
Worked Solution & Example Answer:The makers of Fiat cars merged with the makers of Vauxhall cars in 2021 - Edexcel - A-Level Economics A - Question 5 - 2022 - Paper 1
Step 1
Which one of the following best describes the merger of the makers of Fiat cars and Vauxhall cars?
Answer
The merger of the makers of Fiat cars and Vauxhall cars is best described as C Horizontal integration.
This is because horizontal integration refers to the merging of companies that operate at the same level of the supply chain and produce similar or compatible goods. In this case, both Fiat and Vauxhall operate within the same industry of automobile manufacturing, making them direct competitors who have come together to hopefully enhance their market position and achieve economies of scale.
Step 2
Explain one type of internal economies of scale that the newly merged car company may achieve.
Answer
One type of internal economy of scale that the newly merged car company may achieve is lower average costs due to bulk buying.
As a larger entity, the merged company can negotiate better terms with suppliers, allowing them to purchase materials at lower prices per unit. This reduction in costs can significantly contribute to increased profitability, as they are able to produce vehicles at a lower expense.
Step 3
Explain one likely concern the EU competition authorities may have had about the merger.
Answer
One likely concern the EU competition authorities may have had about the merger is the increased monopoly power.
The merger could reduce competition within the automobile market, leading to higher prices for consumers and potentially less innovation. This consolidation of market power raises concerns about the potential disadvantage it may create for consumers, as the merged company may have less incentive to offer competitive pricing or quality improvements.