Final answer:
The government uses the concept of cross-price elasticity of demand to evaluate the potential impact of a merger between two firms on market competition and consumer choice.
Step-by-step explanation:
The government uses the idea of the cross-price elasticity of demand to determine whether a proposed merger between two firms is a good idea. Elasticity in economic terms refers to the responsiveness or sensitivity of one variable to changes in another related variable. In the context of mergers, cross-price elasticity of demand helps to assess the impact of changes in price on the demand for a good when related goods are involved, such as products from the merging companies.
More specifically, if two firms that produce similar or related products are considering a merger, the government may look at how a change in the price of one product might affect the demand for the other product and vice versa. This is important to understand because it can have implications for market competition and consumer choice. Firms with products that have a high cross-price elasticity of demand may be viewed as close substitutes, and merging them could significantly reduce competition, which might be against the consumers' interests.