Introduction to Management and Organisational Behaviour

1
Chapter 6Market Size and Scale Effects
2
Market Size Matters

• European leaders always viewed integration as
  compensating small size of European nations
• implicit assumption market size good for
  economic performance.
• Facts integration associated with mergers,
  acquisitions, etc
• in Europe and more generally, globalisation.

3
Facts

• MA activity is high in EU.
• Much MA is mergers within member state
• about 55 per cent domestic
• remaining 45 per cent split between
• one is non-EU firm (24 per cent),
• one firm was located in another EU nation (15 per
  cent)
• counterpartys nationality was not identified (6
  per cent).

4
Facts

• Distribution of MA quite varied
• Big-four share MAs much lower than share of the
  EU GDP
• I, F, D 36 per cent of the MAs, 59 per cent GDP
  (except UK)
• small members have disproportionate share of MA.

5
Economic Logic Verbally

• Liberalisation ?
• De-fragmentation ?
• Pro-competitive effect ?
• Industrial restructuring (MA, etc.)
• RESULT fewer, bigger, more efficient firms
  facing more effective competition from each other
  .

6
Economic Logic Background

• Monopoly case

7
Economic Logic Background

• Duopoly case, example of non-equilibrium

8
Economic Logic Background

• Duopoly and oligopoly case, equilibrium outcome

9
BE-COMP Diagram
10
Equilibrium in BE-COMP Diagram
11
No-trade-to-Free-trade Integration
12
Economic Logic

• Integration no-trade-to-free-trade BE curve
  shifts out (to point 1).
• Defragmentation
• PRE typical firm has 100 per cent sales at home,
  0 per cent abroad POST 50-50
• cant see in diagram.

13
Economic Logic

• Pro-competitive effect
• equilibrium moves from E to A firms losing
  money (below BE)
• pro-competitive effect markup falls
• short-run price impact p to pA.
• Industrial Restructuring
• A to E
• number of firms, 2n to n
• firms enlarge market shares and output
• more efficient firms, AC falls from p to p

14
Economic Logic

• mark-up rises
• profitability is restored.
• Result
• bigger, fewer, more efficient firms facing more
  effective competition.
• Welfare gain is increase in consumer surplus
  p,p,E,E.

15
State Aid (Subsidies)

• Two immediate questions
• as the number of firms falls, isnt there a
  tendency for the remaining firms to collude in
  order to keep prices high?
• since industrial restructuring can be
  politically painful, isnt there a danger that
  governments will try to keep money-losing firms
  in business via subsidies and other policies?.
• The answer to both questions is yes.
• Turn first to the economics of subsidies and EUs
  policy.