Horizontal Merger for Economies of Scale

Steps:

• Identify the merger type: Both firms are profitable oil-drillers in the same industry, indicating a horizontal merger.
• Recall horizontal merger goals: Combine similar operations to gain market power and efficiencies.
• Link to cost reduction: Merging allows shared resources like equipment and expertise.
• Conclude the benefit: This lowers average production costs per unit of output.

Why C is correct:

• Economies of scale from horizontal mergers reduce average total cost (ATC = TC/Q) by spreading fixed costs over more output.

Why the others are wrong:

• A: Targets suppliers, describing backward vertical integration, not same-industry horizontal merger.
• B: Aims at customers for forward integration, but both firms drill oil, not distribute.
• D: Tax reduction is not a core motive; mergers focus on operational synergies, not evasion.

Final answer: C