firm incentives,management and competitors



Part 1- Industry Description. 1

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Part two- Two Arguments. 4




Part 1- Industry Description

  1. Describe the firms in the proposed merger. List their annual sales, and extent of their operations.

This particular merger is composed of two main firms, Novartis International AG and Nestle S.A. Novartis International is a multinational pharmaceutical firm with its main offices in Switzerland, Basel. In 2010, the company ranked the second in sales among the global industry, registering sales of about 46. 806 billion dollars. The company manufactures and distributes drugs such as diclofenac, clozapine, carbamazepine imatinib mesylate, letrozole, ciclosporin, among others. The company also owns a large producer of generic medications known as Sandoz. The firm is also involved in consumer health, animal health, research, and development of pharmaceuticals (Novartis).

On the other hand, Nestle S.A is the world’s largest nutrition and food company;the headquarters of the company are based in Switzerland in Vevey. The firm made its most significant growth during the First World Warand during the second war, eventually increasing and expanding its product line beyond its initial infant formula and condensed milk products. The company currently has operations in 86 different countries globally. In 2009, the company earned consolidated sales of about 107.9 billion Swiss francs with the net profit reaching 10.43 billion Swiss francs(Nestle).

  1. From the firm’s point of view, what are some of the incentives to consolidate?

Novartis believes that this consolidation, which will be done under the nation’s Merger Act, will benefit and is in the interest of the company’s stakeholders and that it will provide the needed transparencyon the future of Alcon. The company believes that Alcon will strengthen the portfolio of the firm focused on healthcare and pharmaceuticals and provide a wider access to the rapidly expanding global eye care industry, which is highly driven by an increasing aging population, emerging markets and innovation. According to Novartis, the merger will strategically strengthen the company’s healthcare portfolio and its position in the eye care industry, an industry with a dynamic growth, as a result, of the increasing needs of the aged population (Novartis).

  1. List and describe the firms in the industry.

There are numerous other firms in the eye care industry, which include Ferring pharmaceuticals, which specializes in marketing and development of drugs for use in medicine. Galderma is also another pharmaceutical company that specializes in development, research and marketing of innovative medical solutions. Hoffmann- La Roche operates under diagnosis and pharmaceuticals, while Sandoz is the subsidiary of Novartis that deals with generic drugs (“Top 20 global corporations”).

  1. Describe the product, production methods, scale of production, and sources for raw materials. What technologies are used?

The industry has numerous products to offer ranging from pharmaceuticals, vaccines and diagnostics, generics, animal health products, eye care and over the counter products. The production methods of these products vary according to the production, and so is their scale of production. However, since these firms sale and distribute their products worldwide, their production scale is quite high. The raw materials used to produce these products are mainly developed in the labs using highly advanced technologies (“Top 20 global corporations”).

  1. Describe the competitive environment within the industry. Is there a dominant firm? Are the other firms follow or actively compete? How do they compete?

The competition within the industry is increasingly steep. Though there are a number of dominant companies in the industry like Novartis, the other firms do not just follow quietly, but fight actively to gain and increase their competitive advantage. The companies in the industry actively compete.

  1. Report and interpret the four firm concentration ratio, the eight firm concentration ration and the Herfindahl Herschler Index for the industry.

Four firm concentration ratio

Based on 2010 revenues, in millions

Concentration ration
1 Pfizer $58,523 58523000000/5160000000=11.34
2 Novartis $44,420 44, 420, 000000/5160000000=8.6
3 Merck & Co. $39,811 39,811, 000000/5160000000= 7.72
4 Sanofi $37,403 37,403,000000/5160000000= 7.25
Total transaction value $51.6 billion  
4 firm concentration ratio 34.91


Herfindahl Herschler Index

(4.4 x 4.4) + (3.8 x 3.8) + (3.1 x 3.1) + (2.6 x 2.6) + (2.6 x 2.6) + (2.3 x 2.3) + (2.0 x 2.0) = 66.22/100= 0.66.


Part two- Two Arguments

  1. Explain the importance of competition among firms.

Competition is essential as it causes commercial companies to come up with new services, products and technologies that have the potential of giving customers a wider range of selection and improved products. The increased selection usually leads to a decrease in prices as compared to the prices that would be present without competition (Besanko, 2010).

  1. Explain whether the competitive environment in this industry benefits the society or not.

The competition in this industry is edging towards monopoly especially with most companies looking to acquire and merge with more firms. Such acquisitions and mergers might lessen competition, and result to a monopoly in the industry leading to higher prices, which the society has to suffer, the competition in this case will not benefit the society (Besanko, 2010).

  1. Is a high degree of market concentration a boon or a threat to consumers? Explain. Use either the allocative efficiency or dynamic efficiency arguments.

A high level of concentration is an advantage to consumers because it also increases the available consumer choices in the industry and improves the quality of services and products available. According to the dynamic efficiency principle, such an industry would be dynamically efficient and it is successful in enhancing and improving the available products and at motivating the development of new products(Besanko, 2010).

  1. Can the oligopoly market structure benefit both consumers and businesses by forging common standards in industries that experience rapid technological change?

Yes, by forging such standards, it would prevent businesses from increasing prices according to the innovation of new technologies that protecting customers from exploitation and protecting businesses from incurring large production costs and loses (Besanko, 2010).




Besanko, D. (2010). Microeconomics. New York: John Wiley and Sons.

Nestle. Retrieved from

Novartis. Retrieved from

“Top 20 global corporations”. IMS. Retrieved 2012-01-06


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