A firm has increasing returns to scale and is making profits. The government is concerned that the firm has grown too big, and splits it into two smaller firms of equal size. What effect would this have on overall profits?

Larger firms have market power, which allows them to maximize their profits. If the government splits this firm in two, there will be competition between the firms, causing the price to be driven below the profit-maximizing price. This, in turn, will result in the combined profits of the two firms being less than the profit that was being earned by the single firm.