Consider the Supermarket Industry. Tesco dominates the market with a 43% market share. Its closest rival is Sainsbury's with 19% of the market. Outline the potential costs and benefits of a merger between the two supermarkets.

Benefits:

Economics of scale- shown on graph (movement to lower part of LRAC curve) can potentially pass on cost savings

Profitability

shared resources

High tax revenue for the government

Costs:

Monopoly power can lead to price increase- reduce CS

Exit from the market from other supermarkets

Lack of innovation

Diseconomies of scale from extensive network

inefficiency