[econophile]

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econophile,

if the average cost to the producer goes down in a competitive economy, shouldnt the average cost to the consumer also go down? this argument would seem like the foundation for the point Boris is making wrt prices falling.

all i care about is that they get their [censored] odwalla prices down a bit. 3.99 for a 16 ounce thing of juice? boooooo.

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i don't want to derail this thread, but your and boris's argument is based on a perfectly competitive output market. since most output markets are not perfectly competitive, a better working model is that of monopolistic competition (where there are many producers and each has some market power).

in a monopolistically competitive industry with scale economies, a merger will have two effect. first, it will decrease the average cost of producing the good since the merged firm will generally produce more than either firm did separately (note that mergers could result in less output, e.g. if two firms merge and become a monopoly). second, the merger will increase the firm's market power. the first effect pushes the equilibrium price down, while the second effect drives it up, so the end result could be an increase or a decrease in the prices charged to customers.

to predict whether the merger will make prices go up or down, one would have to estimate the firms production function (how much it costs to produce different quantities) and the consumers' price elasticity of demand (how sensitive the quantity that people buy is to changes in price). in mergers like this, the firm usually hires a team of economists to estimate this stuff and present their results to the department of justice or the federal trade commission, who might then approve the merger or recommend actions that the firms can take to make the merger less harmful to consumers.