Tuesday, July 19, 2011

Cost and Consolidation

The Financial Times reported that airline firms were in merger talks as a result of higher input prices. In Managerial Economic (along with Industry Analysis) we look at a fairly simple horizontal merger model. In that model we explore how changes in cost can affect the profitability of the firms post-merger. Here is an example of how increases in input prices (i.e. costs) can lead to firms wanting to increase the scale of their operations as a means to spread out their costs of greater amount of customers. Notice that this works better when the costs involved are fixed or quasi-fixed from the firms perspective.

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