Question: Evaluate the benefits of Ford merging with BMW.
A major benefit of Ford and BMW merging is that they will become a larger firm with more market share. This may allow them to gain monopoly power, meaning they can raise prices and raise profits. However, if the merger results in a monopoly then the competition authorities may block the merger. For example, in the UK, the Competition Commission may block a merger that results in a monopoly if it believes that monopoly will not act in the public’s interest.
Additionally, Ford and BMW will benefit from greater economies of scale. For instance, technical economies. A larger car producer can use specialist machinery to produce a larger quantity of cars and decrease its LRAC. Also, there is more scope for labour specialisation. They could also benefit from managerial economies. If Ford and BMW merge then they become a larger firm and can employ specialist managers to motivate and organise workers to increase efficiency. But, a larger firm could suffer diseconomies of scale if it becomes too big. Maybe the firm’s managers cannot efficiently deal with all the tasks of such a large firm. Moreover, the legal or admin costs of dealing with lawyers and M&A firms may be too big and outweigh the benefits of the merger. There may also be redundancy costs of firing workers.
Furthermore, a larger firm earns more profit that it may invest in R&D, this means new and better goods for consumers. There may also be scope for synergies. A merged firm could invent better goods by putting their researching powers together rather than researching separately. For instance, Ford and BMW may be able to come together to mix the technologies in the Mustang and M4, respectively. Consumers will therefore benefit from a better muscle car. Although, a larger firm may suffer X-inefficiency, causing its LRAC to rise, prices to rise and consumer surplus to fall. In addition, merges mean less firms and a greater chance of collusion, so prices may rise, car technology may be delayed and consumer surplus may fall.
Lastly, a merger between Ford and BMW may lead to higher profits and, therefore, increased higher wages for workers. A larger firm may also mean less risk and increased job security. On the other hand, there may be redundancies if plants close. Workers may also suffer lower morale in the future as there will be less firms for workers to choose to work for.