Question

Consider the following scenario: A firm acquires a strategically related target after successfully fending off four other bidding firms. Under what conditions, if any, can the firm that acquired this target expect to earn an economic profit from doing so?

Answer 1

There are two particular conditions that the applicable here if the firm wants to make a profit from this takeover,

• Economies of scale, as the firm will be producing more of the goods in the market and that can allow them to lower the price of the goods and increase the profitability.
• Penetration to the new market and forming a dominant firm, as a larger firm in the market they can concentrate more in the market and cause a oligopoly that can cause cartelization and other non competitive tactics to increase the price in the new market that they will be gaining and older markets.