Antitrust authorities at the Federal Trade Commission are reviewing your company's recent merger with a rival firm. The FTC is concerned that the merger of two rival firms in the same market will increase market power. A hearing is scheduled for your company to present arguments that your firm has not increased its market power through this merger.

 Can you do this?  How?

 What evidence might you bring to the hearing?

Answer:

The Federal Trade Commission's arguments / concerns may be tackled in two ways:

(a) The company's post - merger balance sheet can be demonstrated as evidence that the market share of the new organization has not increased substantially and neither the profits have burgeoned proving the fact that the newly merged company does not pose a threat to the market; and

(b) The newly formed company (post - merger) can take the help of Lerner's Index (LI) to prove that it has not gained significantly in terms of creating a monopolistic grip on the market.

Formally it may be expressed as:

                               Lerner's Index (LI) = (P - MC) / P

                                           where P = Price charged by the firm,

                                           and MC = Marginal cost of the firm.

If it is proved statistically in the court that the value of 'LI' is low, then it would imply that there is insufficient monopolistic power of the firm to dominate the market.