Question

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 Citro¨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 through—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?

Answer 1

Answer (a): Mr. Marchionne worried about the firm’s investment in technologies that do little to differentiate brands because he believed that International brands feed from their uniqueness and quality they offer for their products. Now, Marchionne believed that if firms with indifferences in certain aspects glue together, then they fulfill each other’s gaps and the final result that is achieved is a comparatively more fulfilled and streamlined product. They as more adaptive to changing circumstances and business fluctuations.

Answer (b): The Cournot model lucidly explains the rationale that would arguably comply and fix the differences that would arise from the International separateness of the various firms. In the case of such scenario, both the International firms would need to flow out a principle whereby they would perform their dealings either in the denomination or financial terms of any of the countries or in the financial terms of a third country. This would help them to part away with most of the difficulties arising out of the differences in the financial aspects of the two nations, which is perhaps one of the most critical features determining the success of a joint international venture.

Answer (c): If the merger goes through, then FCA and the Renault can do a joint venture output in the both the nations, which would together produce the maximum benefit for the Joint Venture. The profit for the Joint Venture would be maximized only if they can together produce the products and can impress the consumers of both the countries, instead of any particular firm selling its product in a particular country.

Answer (d): The merged firm would initially not want to produce the total of 15 million units of products as they would not want to take the risk of the total output production. They would rather produce a balance output whereby none of the firms would lose any capital if they incur any loss. However, in due course of time, the merged firms will gradually increase their produces and may even surpass the total of 15 million products if they experience a good demand for their product.

Answer (e): The firms would be inclined to merge because they would then be able to taste the success from the foreign countries, and their firms would experience a fluffiness of the gaps in their production function and the overall economic apparatus. This would bring profit to both the firms.

Answer (f): The merged firms would defend their case Infront of the regulator by placing a balanced international merger validation whereby they would both put forward a case where both the firms are enjoying balanced profit, and none of the International trade laws are being violated. This would go a long way in putting a strong case in favor of the merger.