Monday, June 2, 2008
Acquisitions that Create Efficiencies: Merger Analysis and the Treatment of Reductions in Fixed Costs
Posted by D. Daniel Sokol
Robert N. Rubinovitz of NERA discusses Acquisitions that Create Efficiencies: Merger Analysis and the Treatment of Reductions in Fixed Costs in a short and informative piece.
ABSTRACT: This piece examines the ways in which reductions in fixed costs can lead to lower prices or better product quality and innovation. This may seem contrary to conventional economic theory, which focuses on marginal cost pricing, but the effect of fixed cost savings on consumers becomes clearer if we consider how firms actually set their prices. Are prices determined through cost-based pricing and bidding? Will a reduction in fixed costs—particularly in the area of research and development—lead to additional research efforts, increased innovation, and, as a result, increased competition and lower prices? Rob’s conclusion is that if we focus on these questions, among others, we will be in a better position to assess whether and how a reduction in fixed costs may result in benefits to both consumers and competition.