Knowledge - 2 marks
Application - 2 marks
Analysis - 2 marks
Eval - 2 marks
Structure
Para 1: Knowledge - Define an economic concept from the question
Para 2: Analysis - Answer the question + application
Para 3: Evaluation - Provide the opposing view + knowledge
Para 4: Analysis - Answer the question + application
Para 5: Evaluation - Provide the opposing view
The integration between BT and EE is an example of a horizontal merger. This is where two firms merge at the same state of the production process.
One benefit to consumers is better quality of service provided by BT and EE. The merger is likely to increase the firm’s supernormal profits and thus enable them to become more dynamically efficient. This is because the higher profits could be reinvested to for example, help improve internet speeds, technological innovation and customer service. The extract states that “the profit of the UK based telecommunications group rose to £556 in the second quarter of 2017”.
However, to evaluate, the additional profits may not be reinvested and instead redistributed to shareholders. As such, customers may not benefit from an improvement in the service or technology offered by BT and EE.
Additionally, consumers could benefit from lower prices and thus higher consumer surplus. The merger between BT and EE would allow BT to grow and benefit from economies of scale. For instance, BT could benefit from purchasing economies of scale, allowing them to secure discounts from their suppliers on the inputs they buy as they purchase larger quantities. This would reduce their cost of production and they could pass this on to consumers by lowering prices.
However, the merger may result in decreased competition and therefore less of an incentive for BT to lowers its prices. The extract states that the “integration has resulted in BT controlling 35% of the mobile consumer market”. According to the CMA, a firm possess monopoly power if its market share is greater than 25%. As such, BT will now have greater price setting powers and therefore prices may not be lowered, meaning consumers may not actually benefit.
