Read the following excerpt and answer questions below.
CSR and Boral have announced the intention to form a joint venture of Australian east coast brick operations, citing reduced brick usage as a major cause for consolidation. The companies have proposed to combine brick operations in New South Wales, Victoria, Queensland, South Australia, Tasmania and the ACT. The move is subject to clearance by the Australian Competition and Consumer Commission (ACCC). A joint statement from the companies explains brick demand in Australia has experienced a sustained structural decline, with bricks becoming an increasingly smaller component of the broader cladding market. Despite a general increase in construction activity over this period, total brick production in Australia has fallen by 46 per cent from its peak in 1981, according to Boral and CSR.
David Wheeldon
- Using the concept of economies of scale, explain why the two companies MUST merge due to the significant fall in demand (start by explaining why CSR and Boral were able to operate as separate companies before the fall in demand). For this question, assume that CSR and Boral are the only two companies in the market and form an oligopoly (Hint: think about the cost curves and the market demand curve)? As part of this question you need to draw and explain the appropriate graph that outlines the argument in support of the merger.
- If the joint venture is allowed to proceed, how would you describe the new market? What would be the impact on price, quantity and profit? Explain using a graph.