Pearson Edexcel International a Level Economics Student Book Ebook
Evaluate the benefits of takeovers for growth exam answer. Full mark (20/20) exam essay answer for IAL Economics with diagrams. IAL Pearson Edexcel. Microeconomics. Unit 3: Business Behaviour YEC11
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Evaluate the benefits of takeovers for growth
Growth by takeover occurs when one firm acquires another, with the acquiring company
gaining control over the target company's assets, operations, and management.
It could be argued that growth by takeovers, especially horizontal takeovers done within the
same industry and production stage, offer substantial benefits to a business by facilitating
the expansion of its market share—a crucial advantage in markets characterised by high
contestability. This is because by merging, the new firm will gain market power that will
influence their price-setting ability, giving them greater flexibility to set higher prices and
thus generate greater supernormal profits. For instance, in the highly competitive motor
dealer industry in the UK, setting up small, privately owned dealerships will fail to compete
with existing, long-established companies. Consequently, a takeover through horizontal
merger may enable a firm to break into such an industry and gain significant market share,
as was done by Vertu Motors and its investors who entered the market through a 40-
million-pound takeover of Bristol Street Motors Group, followed by several other motor
acquisitions over the years. This form of takeover may be highly beneficial, as it may
enhance the market power of the merged entity, providing it was increased price-setting
ability which it can then use to raise prices so that profits are maximised. This is depicted in
figure 1 below. Prior to the merger, Vertu Motors may not have been able to operate at the
point where it profit maximises due to being a relatively small firm in a highly contestable
market. Through gaining market share, and thus market-power, Vertu Motors may develop
the price setting ability to increase the prices of their vehicles from P1 to P2, and to restrict
output from Q1 to QPM, thus operating at the level of output (QPM) where profits are
maximised. This may enable Vertu to generate increased supernormal profits as illustrated
by the increase in area from P1.C1.Y.X to P2.C2.B.A. Indeed, as of today Vertu motors has
pre-tax profits approaching 25 million pounds. Hence, through increasing market share,
gaining increased price-setting ability and thus being able to charge higher prices, growth
through takeovers may be highly beneficial to a business through enabling them to generate
increased supernormal profits.
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