Airfrance Klm Merger Case

2230 Words9 Pages
1. Introduction In 2004 Europe’s largest airline group was formed after the European Commission had approved a merger between French Air France and Dutch KLM. A merger of this dimension certainly has major influences on the economy. This paper will give an insight on the incidents of this instance, the economic consequences and it will deal with the question whether the European Commission’s decision was reasonable. First of all the two firms will be introduced and an overview about the merger will be provided. After that some basic economic concepts will be explained, followed by a merger’s consequences on the economy. The next part will then deal with the European Commission, in particular their investigation of the situation and its…show more content…
The reasoning is, that in a perfectly competitive market a large number of sellers offer “homogeneous or undifferentiated products” (Perloff, p.220), thus the demand for these products or services is perfectly elastic as the consumer can easily substitute one firm’s for another. Consequently, each firm can sell its product or service at the market price but as soon as a firm raises the price, its customers would wander off to another supplier. In the supply and demand model an increase in prices can usually also be achieved by reducing production and therefore supply (Perloff, p.27). In a perfectly competitive market, however, there are no barriers to entry, which means that new firms could enter the market to satisfy the excess demand, thereby keeping the market price unchanged (Perloff, p.242). These conditions make the producer side a “price-taker”, which is the definition of a competitive market (Perloff, p.220), and certainly benefit the consumers, thus welfare indeed is maximized in a competitive market. 3.1 The Welfare Concept When a market lacks competition the consumer suffers. The most extreme scenario of lacking competition is that of a monopoly. In a monopoly there are no substitutes to the single supplier’s products or services, so the consumer cannot choose between different sellers and simply has to accept the price that is asked. Figure 1 below shows the welfare effects of a monopoly. In a competitive market a “firm’s […] supply curve is its marginal cost

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