How do mergers and acquisitions affect competition in imperfect markets?

Mergers and acquisitions can reduce competition in imperfect markets by creating larger, more dominant firms and potentially forming monopolies.

In imperfect markets, where there are barriers to entry and firms do not operate under perfect competition, mergers and acquisitions can have significant impacts on competition. When two or more firms merge or one firm acquires another, the resulting entity often has a larger market share. This can lead to increased market power, enabling the firm to influence prices and output levels to its advantage.

For instance, a merger between two firms in an oligopolistic market can lead to a more concentrated market structure, potentially even creating a monopoly. This can result in higher prices and lower output, as the new firm can exploit its market power to maximise profits. This is detrimental to consumers, who face higher prices and fewer choices.

Moreover, mergers and acquisitions can lead to a reduction in the number of firms in the market, which can decrease competition. This can result in less innovation and lower quality products, as firms face less pressure to improve their offerings to stay competitive.

However, it's important to note that not all mergers and acquisitions reduce competition. Some may actually increase competition by creating a stronger competitor in a market dominated by a few large firms. For example, a merger between two smaller firms may enable them to compete more effectively with larger rivals, leading to increased competition.

Furthermore, mergers and acquisitions can lead to efficiencies that benefit consumers. For instance, the merged firm may be able to achieve economies of scale, leading to lower costs and potentially lower prices for consumers. It may also be able to combine resources and expertise to innovate and improve product quality.

In conclusion, while mergers and acquisitions can reduce competition in imperfect markets by creating larger, more dominant firms, the impact on competition depends on the specifics of the merger or acquisition and the market structure. Regulators often scrutinise such deals to ensure they do not harm competition and consumers.