Managerial Economics: Mergers and Acquisitions

The last decade has witnessed an unprecedented number of mega-mergers in the banking industry. What are the potential cost advantages of these mergers?

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Mergers in business management are critical in generating enough resources for an organization to operate effectively while providing a platform for a harmonized management approach. In the banking sector, the option of merging is usually a major capital budgeting undertaking. It largely saves costs and improves economic gains. Besides, it improves the effectiveness of financial institutions and minimizes loss of revenue through aspects such as taxation and operating on a small scale.

Mergers in the banking sector provide offer firms with numerous cost advantages. Samuelson and Marks (2012) explain that whole some of the reasons for most mergers include diversification, acquisition of more resources, and gaining market power, the main advantage of merging operations in the banking sector is saving costs. Most banks suffer from cost inefficiencies because of operating as single entities.

Is a $300 billion national bank likely to be more efficient than a $30 billion regional bank or a $3 billion state-based bank? What economic evidence is needed to determine whether there are long-run increasing returns to scale in banking?

Large banks usually enjoy huge advantages over smaller or relatively medium-sized banks. According to Bruner (2004), it is possible to measure the economic importance of large banks over small ones in terms of geographical location, scale, and scope of business. A $300 billion national bank provides unique benefits to customers by offering a large variety of products and services. This does not mean that smaller banks do not enjoy economic benefits. In terms of scope and scale of operations, larger banks reap long-term increasing returns contrary to smaller banks.

Do you think these mergers are predicated on economies of scope?

Bruner (2004) argues that the essence of forming any merger lies in the desire to infer stronger guidance and create a focus in operations. Merging banks increases economies of scale among partners. A matrix structure assimilates and harmonizes regional and functional core commonalities amidst emerging competitors. Therefore, it is possible to predict the latter based on the economies of scope.

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Explain why the cost structure associated with many kinds of information goods and services might imply a market supplied by a small number of large firms.

Over the years, e-commerce is a core factor in determining the levels of growth of small and growing businesses. However, the growth and development of a business such as a grocery shop may suffer major setbacks related to the small size of operations, reduced economies of scale, and transaction problems. These problems impede the operations of various business developments that rely on e-commerce. As such, creating effective network externalities, pricing, output, and advertising are critical in restoring the operations of such businesses (Bruner, 2004).

Special focus on innovation and technology is critical for emerging markets because the individual capabilities of businesses are quite different. Unlike the developed markets, emerging markets are unique both economically and culturally. Research and development in e-commerce networking assist businesses to understand clients’ demands and even involve them in understanding products (Samuelson & Marks, 2012). However, the pricing, output, and advertising capabilities of smaller businesses limit the ability to reach well-established markets. Besides, lower prices of products affect their ability to compete favorably. Improving network externalities and forming mergers are among the best solutions that can enable smaller firms to acquire adequate resources for competing with other market rivals.

Network externalities can also affect a firm’s operating strategies when mergers and acquisitions take place. Mergers transfer management capabilities. Nonetheless, analysts argue (based on the thick frontier method) that there is little cost-saving advantage on network externalities especially when strategies used are not effective. It is also crucial to mention that demand heavily relies on network externalities adopted by a firm (Bruner, 2004). For example, the type of advertising methods adopted by an organization depends on the desired demand level for its goods and services.


Bruner, R. (2004). Applied Mergers and Acquisitions. Hoboken, NJ: Wiley & Sons Inc. Samuelson, W. & Marks, S. (2012). Managerial economics. New Jersey: Wiley & Sons Inc.

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