tutor2u | Do takeovers improve economic efficiency?

Study Notes

Do takeovers improve economic efficiency?

A Level, IB
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 21 Mar 2021

A study note looking at some of the arguments for and against the statement that takeovers help to improve economic efficiency.

Key points:

  • Many takeovers are driven by managerial motives
  • Most mergers / takeovers are cleared on competition grounds – but the Three-O2 Merger was blocked by European Commission (May 2016)
  • Market structure following a takeover is perhaps less important than the actual behaviour of firms in terms of pricing, non-price competition etc.
  • Horizontal integration is most likely to raise concerns about the concentration of market power
  • But most industries are contestable with a threat of fresh competition + some disruptive smaller entrants

Arguments in support - benefits from takeovers

  • Economies of scale from horizontal integration (productive efficiency)
  • Higher supernormal profits lead to increased R&D spending and more innovation (dynamic efficiency)
  • Firms with monopoly power still face competition in contestable markets (charging allocatively efficient prices)


  • Increased market power can lead to X-inefficiency (managerial slack, waste)
  • Risks of diseconomies of scale (rising long run AC)
  • Many takeovers fail to achieve forecast cost gains
  • Growing number of de-mergers points to limited impact of takeovers on overall economic efficiency
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