Explain reasons why a firm would want to merge with another firm in the same industry.

One reason is that the firm can gain from asset stripping economies of scale. An example of this is the merger of the two telecommunication firms T-Mobile and Orange in 2010. These firms can gain by selling off duplicate resources such as phone networks to generate additional revenues. As a result, the firm can use the additional cash to reinvest for instance in R&D in order to gain a competitive advantage over competitors for instance.

Furthermore, from the merger, the firm can increase its market share in the market. As a result of the Orange and T-Mobile merger, EE (the resultant of the merger) became the UK's largest provider with a market share of 37%. Firstly this reduces competiton in the market due to a reduction of competiting firms. As a result, the firm can increase its monopoly power and thus undergo price setting strategies to price out competitors in the market. An example is predatory pricing and could have the effect of causing competitors to leave the market as evidenced on the costs/revenue diagram (shown on whiteboard).