Consider the following edited excerpt from an article published in the The Economist on May 30, 2019: On May 27th FCA [Fiat Chrysler Automobiles], an Italian-American firm, said it was seeking a merger with its French counterpart Renault. If a deal goes ahead, it will create an automotive colossus… The grand total of 15m cars [jointly sold by the two firms] would leave everyone in the dust. Sergio Marchionne, FCA’s charismatic boss who died last year, had called for consolidation of the mass market, where slender profits are partly the result of duplicated investment in similar technologies, such as engines, that do little to differentiate brands. On paper, FCA and Renault look like perfect partners. They plug gaps in each other’s businesses both geographically and in terms of products. FCA’s strength and profits come from America; Renault’s from Europe. The French firm’s cheapmodels and EV [electric vehicles] know-how complement FCA’s pickups and upmarket brands such as Alfa Romeo and Maserati. If size at the top of the industry moves from 10m to 15m cars a year, will others seek to follow? Ford and VW are in a partnership that could grow closer. PSA, which makes Peugeots and CitroÃ‚Â¨ens, is open to offers. In the following questions you are expected to uses models and concepts developed in class. The goal is to apply those models to better understand the forces at work that are described in the article. (a) Why did Mr. Marchionne worry about firms’ investments in technologies that do little to differentiate brands? (b) How would you rationalize the geographic differences in levels of profits and (arguably) market shares among FCA and Renault in the Cournot model? (c) What would the model in (b) predict about the allocation of output across markets if the merger goes throughÃ¢â‚¬â€would FCA start selling more or less in Europe? (d) Would the merged firm keep the output at 15m cars a year? Would the competitors be willing to increase or decrease their production? (e) In the last paragraph, why could the competitors be inclined to merge if the merger described in the article goes through? (f) Based on the facts provided in the article, why could an antitrust authority be worried about this merger? How could the merging firms defend their case in the eyes of the regulator?
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