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IAI Actuarial Core Principles · Business Economics · Relationship between the government and the individual firm

A competition authority is examining a proposed merger between two large private banks. Which of the following is the most direct economic reason for a regulator to scrutinise the merger?

Regulators scrutinise mergers mainly because combining two large rivals may create market power. The merged firm could then raise prices, restrict output or lower service quality, harming consumers, which is the core concern of competition policy.

  1. AThe merged bank may gain market power and be able to raise prices or reduce service qualityCorrect
  2. BThe merged bank will necessarily make lower accounting profits
  3. CShareholders of both banks will receive fewer dividends
  4. DThe merger will always reduce the number of bank branches in the country
  5. The merged bank will no longer pay corporate tax

Explanation

Competition policy on mergers focuses on whether a reduction in the number of rivals gives the merged firm market power, leading to higher prices, lower output or poorer quality. The other options are not general economic grounds for merger control: profits, dividends, branch numbers and tax status are not the central concern.

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