Two or more similar business companies may decide to combine their businesses into one large company. These are what are referred to as mergers. This may be for several reasons which include an aim to compete with other companies and get as much as possible market share (Schinkelet al, 2010). Companies may also merge or combine their business in order to put together their technical skills and all other necessary resources that are likely to boost the performance of their business. However mergers may have several effects on the welfare of the society of operation.
The following gives an illustration on how mergers affect the welfare of the society.
Fig.1. Effects of mergers
A-Producer surplus B-Deadweight loss C-Transfers from consumers to producers
When the two companies merge, they form a big firm with more economies of scale especially in the cost of production. Using the graph above the initial marginal cost of production was at MC1. When the two companies merge, the cost of production reduces to MC2. This then saves cost while maintaining a high level of output. However, due to lack of competition the mergers will tend maximise their profits by raising prices from P1 to P2. This will then affect the welfare of the consumers as it will cause a reduction in consumer surplus leading to an economic deadweight loss at level B. The transfers to producers will then reduce as indicated in C.