Question: Examine whether a merger between Sony and Samsung will increase contestability in the market for HD televisions.
A contestable market is one in which there are little (or no) barriers to entry or exit and entry/exit costs are low (or zero), so the threat of potential competition is high.
Contestability may fall because, if Sony and Samsung merge, they will become a larger firm with more market power. For instance, the merged firm could use their larger profits to innovate, produce new HD televisions and outcompete their rivals. However, the merger may result in a monopoly and higher prices. This could actually be good for contestability because higher prices mean smaller television producers may now be able to compete as they can cover their costs whilst they are not benefiting from economies of scale.
Additionally, the merger may decrease contestability if the larger firm benefits from economies of scale which reduces their AC below their rivals’. This merged Sony-Samsung firm could then outcompete rivals by charging lower prices. On the other hand, the larger merged firm could suffer from diseconomies of scale and/or X-inefficiency and, thus, a high AC. Rivals could then compete with the large firm, increasing contestability.
Also, the merger may lower contestability if it results in higher entry barriers. If Sony and Samsung merge then their HD television rivals must spend more on advertising to build a brand to compete with the bigger firm. Although, the HD television market may already have such high entry barriers or sunk costs that the merger does not have any significant effect on contestability and new firms entering.
Moreover, the merger may reduce contestability if it allows the larger firm to cross-subsidise. Maybe the Sony-Samsung firm could make a very large profit in one market (perhaps Blu-ray players) and use those profits to fund a loss by charging lower prices in the market for HD televisions. Rivals in the artificially-low priced market will then be outcompeted. However, the competition authorities may become weary of the merged firm’s actions and punish them because they may be acting against the public’s interests.