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Capitol Comment

    Capitol Comment 204 - Are Mergers Really Harmful to Consumers?

    09/29/1998

    Imagine the following headline: "Policymakers Panic in Fear of Merger Mania!" Although it could be true, in reality, there is little to fear. With the economy growing rapidly for the past eight years, we have witnessed a record increase in the number of corporations merging with one another. Common reaction to mergers is a suspicion that corporate America is gobbling up its competitors, which will mean higher prices for consumers.

    Imagine the following headline: "Policymakers Panic in Fear of Merger Mania!" Although it could be true, in reality, there is little to fear. With the economy growing rapidly for the past eight years, we have witnessed a record increase in the number of corporations merging with one another. Common reaction to mergers is a suspicion that corporate America is gobbling up its competitors, which will mean higher prices for consumers. In today’s global and intensely competitive markets, however, mergers may be better described as an attempt to combine resources and technologies in new ways that better serve consumers. And because we are in an open market, the threat of competition from any corner of the world forces everyone – no matter how big – to keep prices low and quality high.

    Usually mergers are associated with a line of argument that is ill-informed, and, as a result, misleading. Catering to this fear, regulators are threatening to crack down on the recent wave of mergers. Worse, some lawmakers in Congress appear ready to push for legislation to subject corporations wishing to merge to a form of regulatory blackmail.

    The traditional pro-regulatory argument sounds like this: "A merger occurs when two companies join together in order to corner a market. The result is bad for consumers in every respect: increased market dominance, widespread job loss, less competition, fewer choices and higher prices." It’s just not true.

    Those who are caught up in the sensationalism of "merger mania" claim mergers create corporate giants that dominate industries. They forget that corporations are vulnerable to the same threats from competition regardless of size. Corporations that become inefficient or make bad decisions will fail. Often, companies must grow to compete in today’s international markets and a merger allows them to earn international exposure. Simply put, mergers occur when corporations attempt to achieve market efficiencies through competitive agreements or by combining efforts to grow in size and compete in new markets. The constant pressure from competition, both at home and abroad, keeps even large companies in check.

    There is also a perception that mergers result in widespread job loss. In fact, while we are experiencing more mergers than ever today, we are enjoying a period of record-low unemployment. Corporations merge for growth opportunities and as companies grow they typically add employees. While temporary job loss may be associated with a specific merger, today’s mergers are a sign of a strong and dynamic economy. Enhancing economic growth builds prosperity and creates jobs. The alternative to a company merging and increasing its efficiency is for that company to fail, which would have far more disastrous consequences for all of the company’s employees.

    In what has become a global marketplace, it is difficult for one company, no matter how large, to eliminate the competition – which is why it is hard to believe the allegations that mergers result in less competition. Consider the automobile market. There are three main American manufacturers, yet they sell just 61 percent of the cars in America, and on a global scale, they account for only 28 percent of the world’s production of vehicles annually. Competition in the automobile market is fierce, with plenty of foreign cars to keep domestic manufacturers lean. While one cannot say that mergers actually increase competition, it is clear they do not necessarily limit it.

    As corporations merge they broaden their customer base. Consumers benefit from this because, in the end, they will have more products from which to choose. As a company increases its customers it reduces the relative cost for developing a new product, as the corporation will have more people to whom they can sell. Successful mergers produce what is known as an increased rate of innovation – when corporations introduce new products and services faster than they did before the merger.

    Finally, some consumers assume that mergers would mean higher prices at the checkout counter. But companies merge because they seek a competitive edge. They want to cut costs and improve efficiency. In a competitive marketplace, it is difficult for companies to boost profits simply by raising prices. Pressure from competitors keeps product prices low. For merged companies, a stronger bottom line comes from new innovation, a more efficient use of resources, and ultimately, from developing products which serve consumers better than their competitors.

    In sum, mergers are healthy for the economy. If successful, they bring cost savings, improve profitability, stimulate economic growth and create jobs. If not, the market quickly disciplines those corporations who misallocate resources. Putting the government in the business of making decisions about the nature of the marketplace is far more dangerous than any merger. Government policies cannot guarantee the efficient use of resources and, more often than not, are used to protect firms from the forces of competition. The best policy is to allow corporations, their shareholders, and consumers to make a collective decision about the success of a company.