Examine the likely benefits to consumers of the integration between BT and EE

Edexcel A-Level Economics Paper 1 June 2019 Extract

With reference to Extract B, examine the likely benefits to consumers of the integration between BT and EE. (8 marks)

Firstly, the horizontal integration of BT and EE is likely to allow for greater economies of scale, which is when long-run average costs fall as output increases. This can allow for potentially lower prices for consumers. They claim the merger will allow for 'great value bundles of services'. One example of economies of scale is BT's increased ability to bulk-buy items like packaging materials, chargers and cables.

Secondly, the integration might lead to an improvement in the quality of products. In theory, BT and EE would be operating as a monopoly, which allows them to make more supernormal profits. The extract mentions that they would control 35% of the mobile consumer market. This would allow them to re-invest more in the long run, allowing for more dynamic efficiency in the market, which benefits consumers. Extract B mentioned that BT reported an increase in profits due to higher revenues following the integration with EE.

However, it should be considered that with a 35% market share, the decrease in costs may not lead to lower prices. If BT and EE have no competition, they have no reason to reduce prices, and therefore they may keep prices high to maximise their own profits. This would lead to a reduction of consumer surplus in the market.

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