Economics
Study Notes
Do takeovers improve economic efficiency?
- Level:
- A Level, IB
- Board:
- 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)
Counter-arguments
- 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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