Discuss the likely concerns of the competition authorities regarding the proposed merger of the two companies

Edexcel A-Level Economics Paper 1 June 2024 Extract

Discuss the likely concerns of the competition authorities regarding the proposed merger of the two companies referred to in Extract C. (12 marks)

One concern of a merger is that the firm will exploit their monopoly power through high prices. Extract C line 3 mentions that it is a £29.5 billion deal which means that Nvidia will gain a signficant increase in their market share, which is already very high to begin with. Because Nvidia would have increasing market share, they will have even greater price setting ability. Monopolies set prices to profit maximise, which is at the point where marginal revenue equals marginal cost. 

At this point, firms are allocatively inefficient. This is because, at q1, they are setting a price (p1) that is greater than marginal cost. This means consumer surplus is not being maximised and consumers will not be getting as much value for money when buying goods and services where chips are produced from Nvidia. 

However, price-setting power also means that firms like Nvidia are able to make supernormal profits in the long run, leading to the ability to re-invest and innovate and improve products. This is known as dynamic efficiency and will mean that consumers benefit in the long run, for example with faster chips and faster phones and computers.

A second concern of a possible merger is that firms in a monopoly is poor choice for consumers. In a market with monopoly power, there are usually high barriers to entry. This prevents new firms from entering the market. This means consumers will not have much variety of goods and services to choose from. The extract also mentions that 'the merger could reduce choice'. Firms with monopoly power are able to exploit consumers by selling one good or service at a high price knowing that other firms are unable to undercut them or provide better quality for the same price. Also, there are 'severe global shortages of computer chips' mentioned in the extract which only means there are higher costs, thus making it even less attractive for new firms to enter the market, thus increasing barriers to entry and magnifying the concerns.

However, if Nvidia increase their size they will be able to benefit from economies of scale, where a larger output leads to lower long run average costs as mentioned in Extract C, Line 10. This could be beneficial as low costs could be passed down to consumers in the form of lower prices.

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