Essay
Essay Unit 3 - Business Economics and Mergers
- Institution
- PEARSON (PEARSON)
This essay includes two points using chains of analysis that evaluates the likely benefits of mergers between two container shipping companies.
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With reference to the information provided, evaluate the likely benefits of mergers betweencontainer shipping companies.
A merger occurs when two or more companies join together under common
ownership to become a newly integrated firm.
A likely benefit of container shipping companies merging together could be
increased profits. As stated in extract 3, line 4 “Some analysts believe that
higher market concentration results in greater efficiency and higher
profitability.” This is because as container shipping companies merge, this
increases the new firm’s overall market share. As the company operates at a
larger scale this may then assist the firm in reaching economies of scale.
Therefore, allowing the firm to increase output levels at lower prices. As a
result of this, the firm may see a rise in profit. Conversely, extract one states,
“Japan’s three biggest container shipping companies… will invest a total of
¥300 billion (US$2.86 billion) in the merger.” Given that takeovers are usually
financed by the means of loans, this could potentially leave the newly
integrated firm with a large amount of debt that could outweigh the firm’s
profits.
Another potential benefit of a merger may be reduced competition. As stated
in extract 3, “In low demand and overcapacity environment, the pressure to fill
these ships is enormous, leading to price wars.” Due to an over-saturated
market, mergers have “provided relief to the industry that has been over-
characterised by over-capacity.” As a result of this, firms will experience less
competition. A reduced amount of competition may allow container shipping
firms to increase prices as there will not be as many rival firms available to
undercut them. As firms see an increase in total revenue and a fall in total
costs, due to economies of scale, this might lead to an increase in profit, thus
benefitting the firm. However, the extract states that “fewer shipping
container companies means that there may be less incentive to cut prices.”
Higher prices may result in a fall in demand, which would negatively affect an
already declining industry. So, it is possible to argue that a merger will not
benefit container shipping companies unless effectively managed in terms of
pricing.
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