Microeconomics and Behavior

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We have established that the behavior of firms in the market have shown an increasing trend toward mergers, and that these mergers increase advantage relative to the relevant competition (which is what we want). Our next consideration is now the cost of expansion. Let’s say our accountants, or some advisers within our firm, have shown that it would be costly in the short run to make business trips to Europe for the purpose of strategic alliances with French telecom How can we respond to this critique? The principle of economies of scale justifies such an expansion.

By definition, economies of scale refers to the process of reducing average costs in the long run by increasing the size of the plant, the size of the firm, or the size of the industry. Refer to the definition given below: Economies of scale: Definition: This basically means the benefits of reduction of average costs resulting from larger scale production. Gains in output and/or costs may be achieved from increasing the size of plant, the size of firm or the size of industry. For example, costs per unit output are likely to decrease if lower prices of inputs are possible through bulk buying.

Also technological methods which may be impractical at lower levels of production may become economically beneficial at higher levels. Equally, if by-products are produced in larger quantities and more continuously, they may become saleable commodities for a ready market. Let’s say that the expansion of our telecom firm into Europe requires us to spend for the purposes of establishing firms abroad with strategic partner, French telecom B. Those opposed to expansion will argue that it is an additional expense.

True enough – in the short term. Our goal is to gain long term competitive advantage compared to the relevant competition. Therefore, by the principle of economies of scale, the costs of expansion are justified by the long term benefits of increased market share and advantage over our U. S. competitors, who have not made a similar investment. Thus far we have established that not only will mergers be advantageous for our company, but it is desirable to do so before our rival firms realize the benefits of this move.

Lastly, by the Kahneman and Tversky value function, we can be assured of the likelihood that our competitors will give more weight to losses than any gains in their operations. From this understanding we can proceed with confidence to making our merger, because for every day that our U. S. competitors delay in making a merger, their customers will perceive it as a loss. (Why is telecom A so much bigger now, with French telecom B as its partner? Why hasn’t our company grown as well? )

The Kahneman-Tversky value function will act as spur to our competitors to follow our lead, but we will have the advantage since we secured the merger long before they did. And in the long term, with our U. S. telecom A partnered with French telecom B, we will derive substantial profits at reduced cost with respect to our U. S. competitors. Conclusions: Based on the current trends in the behavior of firms, mergers are a profitable investment. It is the recommendation of this study to the manager of our company to expand. Let us recall that our company, U. S. telecommunications

A, has chosen France as its partner in the telecommunications sector, for the following reasons: The French have a long history of natural monopoly in the telecommunications sector. From the point of view of monopoly, the French managers will realize that mergers allow our U. S. telecom A and French telecom B to have a greater share in the U. S. market, relative to firms that do not make mergers. Next, in response to the argument that expansion is too costly, we have applied the principle of economies of scale.

This shows that the short term costs of mergers and expansions will translate into long term benefits in the form of decreased production costs. When the public sees US telecommunications A merged with French telecommunications B in one region, then another, then another, they will conclude that our combined firms have a powerful market presence, as compared to our competitors, U. S. telecommunications firms C and D. That is our goal, to establish ourselves as the leading telecommunications provider in the U. S. market, through

mergers, relative to our competitors. In addition, the Kahneman-Tversky value function will compel our U. S. competitors to see each day that they have not ventured into a merger with a European partner as a loss. They will have to scramble to establish international partnerships, while we have already gained a lead by establishing our mergers early on. Therefore, it is in our company’s best interest to establish a merger with a powerful European company in the same field, which, in this case, is French telecommunications firm B.

Works Cited:

1. Frank, Robert. Microeconomics and Behavior. New York: McGraw-Hill, 1997. 2. http://www. westburnpublishers. com/marketing-dictionary/e/economies-of-scale. a spx 3. Hans-Werner Gottinger – Economies of Network Industries New York: Routledge. 2003. 4. Mueller, Dennis. The Corporation: Investment, Mergers and Growth Routledge, 2003. 252 pgs. 5. Noam, Eli. Telecommunications in Europe. New York: Oxford University Press: 1992. 6. Culpan, Refik. 2002. Global Business Alliances: Theory and Practice Connecticut: Quorum Books.

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