Question

How can a firm in a merger avoid action by the government?

Answer 1

Solution:

Governments often feel that too few suppliers in a market causes problems.

One problem is that a market where the supply of goods is controlled by a few sellers confers a lot of "market power" to the sellers to set prices above the prices in a perfectly competitive market (where there are a large number of suppliers).

So - the government looks at mergers to see how much the "market concentration" changes from before and after the merger. The calculations normally involve the market share of the companies (call it S). This is most common with "horizontal" mergers, where two companies selling the same type of product want to merge (like McDonalds and Burger King). (A vertical merger would be where two companies making related products merge; like a computer hardware maker and software designer.) Horizontal mergers come under more scrutiny because vertical mergers are usually justified as cost savings measures for companies.

A firm in a merger avoid action by the government by an efficient utilization of resources and network also grows post-merger. It helps in cost reduction also. The merger brings firms together who complement each other. Thus, long term sustainability increases. For example, one firm having capital compliments the other firm having good labor resources. Benefit of R&D will be good for the new firm after merger. Also, R&D cost will also come down. Consolidation of market share will help gain new firm after a merger to gain competitive advantage over the competitors. Economy of scale takes place.

Mergers will increase the market share of the company. It can put a high entry barrier that prevents a new company to come in to the market. It can reduce prices so that other firms will also be forced to reduce the price and they will be forced out of the market. Consumers will get a lesser choice in the market initially. Later on, they will be higher prices for the product as there will be monopolist behavior of the merged firm. Real world examples consist of merger of AT&T with T mobile in the USA. Even, Microsoft also faced anti competition case because they bundled Internet Explorer with Windows operation system. Microsoft were charged of manipulation with application programming interfaces. It creates anti competition to OPERA or Netscape Navigator.

Potential merger affects the trade practices as a merged company manipulate prices and other strategies to drive away smaller firms out of the market. Bigger market share owned by the merged firm increase the market concentration that brings monopoly in a market. It kills the soul of free trade for all the firms. Consumers also get product at higher prices. It is not good for the economy. Real world examples of AT&T with T mobile, Microsoft simply illustrate the case of anti-competition.