Explain why an Analyst working for the Anti-Trust Division of the Justice Dept.

Question

Explain why an Analyst working for the Anti-Trust Division of the Justice Dept. would benefit from understanding cross elasticity of demand when evaluating the proposed merger of Coca Cola Company and Pepsi. Gotta understand the job of the analyst. Fight monopoly. what info is needed to make a decision on this case? Are the two firms complements or substitutes? How do you get that info? Cross elasticity. So what happens if they are substitutes and they merge? A monopoly is created. So, what should the analyst do? Write this up again.

Please I need the answer in detail, since I need to submit this as my assignment

Explanation / Answer

Let us first understand what is cross elasticity of demand and what is a merger . Cross elasticity of demand is an economic concept which explains the responsiveness of quantity demanded of one good when change in price takes place in another good . Mergers are deals whereby two companies unite to become a single giant one . It is also called horizontal integration .

Here an analysts role is to analyse the market demand for these two companies in order to prevent monopoly . If Coca cola and Pepsi are perfect substitutes then thier cross price elasticity would be a positive infinity . In such a case if there is a merging then both the companies take up a huge market share . People now cannot replace pepsi with coca cola when there is a price rise for pepsi since they are a single company now .

So if now the merged company pursues a overall market price rise then there would be high profits for the company . This is kind of monopolizatin . Such mergings should be prevented .

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