Final answer:
A 5% price increase of Ford cars by a hypothetical monopolist that affects profits can dictate if the merger results in market power and a relevant antitrust marker. A breakup by antitrust authorities leads to higher average costs but may increase competition. Globalization has broadened competition, reducing domestic market concentration and promoting industry innovation.
Step-by-step explanation:
When considering a merger between Ford and General Motors, and their collective impact on the market with Toyota, we need to understand the hypothetical monopolist test. This test assesses whether a single firm, if it controlled the products of all these players, would find it profitable to impose a small but significant and non-transitory increase in price (SSNIP). If we apply this test and find that:
- (a) A 5% increase in the price of Ford cars leads to a decrease in profits, this suggests that sufficient substitutes are available and that the merged entity does not have market power.
- (b) A 5% increase in the price results in increased profits, this indicates that the merged entity could exercise market power, as consumers do not have sufficient alternatives and are thus more captive to the price changes imposed by the hypothetical monopolist.
In the case where antitrust authorities decide to break up the cartel, this can lead to less productive efficiency due to higher average costs from smaller production scales. However, in an environment where firms are permitted to form a cartel, they would act as a monopoly and set prices and output levels that maximize profits, but this will be at the expense of consumer welfare and can lead to regulatory intervention.
Globalization has expanded market boundaries, creating a more competitive automotive industry on a global scale. This competition has resulted generally in a decrease of market concentration measures like HHIs below domestic levels, promoting innovation and consumer responsiveness.
The complete question is:Assume that Ford and General Motors are merging in the car manufacturing industry. Then, the two companies together with Toyota would form a relevant antitrust market if a hypothetical monopolist controlling the product of all those firms:
(a).increases the price of Ford cars by 5% and profits decrease
(b).increases the price of Ford cars by 5% and profits increase