In today's modernized world, there seem to be several luxuries that we can not live without. In a large metropolitan area such as Los Angeles, cars and the gas that fuels the cars are a must. So what would happen when the number one and number two oil companies in the United States decided to merge together?
The deal itself would be worth 75.3 billion dollars, making the new Exxon Mobil one of only two major fuel providers along with Royal Dutch/Shell until the merger between British Petroleum and Amoco Corp. is approved. For Exxon and Mobil, they would be saving over 2.8 billion dollars in near term savings alone, have access to more resources then they would have individually (meaning an outward shift in their supply of fuel), and stronger market power then before. The most prominent concern that our government would have is the last change--just how much more market power would this new corporation have? Since gas and fuel products are already at a generally inelastic demand, any downward shift in quantity supplied even with supply shifted outwards would only increase the firm's profits with the consumers powerless to stop it. Even with a second or third competitor in the fuel industry, this market would still be monopolistically competitive. Exxon and Mobil knows that they can charge below the supply and demand equilibrium for their own good, and would only be prompted to shift quantity supplied back near equilibrium only if a competitor like Royal Dutch/Shell continues to sell at the market equilibrium. It might be inefficient (having a dead weight loss) by selling below the market price, but it would be profitable. Unfortunately, in this natural resources market, entry is not easy. To be even a minor contender, one must go through the hassle of obtaining the land with the resources, equipment to extract and to refine these resources, and finally distribution of the final product. This obviously requires much capital and skilled labor to begin with, making the new entries nearly ineffective as to changing the output of gas.
For Royal Dutch/Shell and other competitors they would hope Exxon Mobil would produce with excess capacity, they would then be able to match Exxon Mobil's production so all firms in the fuel market would be selling below equilibrium, and every firm would enjoy higher profits at the consumers expense. However, if Exxon Mobil decides that with its new abundance of resources, Exxon Mobil can intentionally shift quantity supply outward. Even though Exxon Mobil would be making less profit, the consumers would now be prompted to buy Exxon Mobil gas instead of any other. The few competitors in this market would have to attempt to match Exxon Mobil's lower pricing or be run out of business. Even though all firms would be suffering, since Exxon Mobil has the most resources, they would outlast everyone else. This is the kind of market power that our government wishes to prevent.
On the consumer side, if the merger is allowed, there could be a slight increase in gas prices in the long run. Unless Exxon Mobil decides to try to run other competitors out of business, then the consumer would experience a definite decrease in prices for gas in the short run, but a great increases in price in the long run should Exxon Mobile succeed and become the only major firm offering to sell gas. Either way, a merger would not be for the better for us, the consumer.