Question

A host of best-selling books advance the thesis that increases in conglomerate mergers and concentration of U.S. industry are responsible for "obscene profits."

Do you agree or disagree? Defend your choice. Explain, using the Lerner Index.

Answer 1

It shall be noted that the truth is that big corporate houses actually do not earn big profits. Conglomerate mergers is a merger between firms that are involved in totally unrelated business activities. Thus, it becomes difficult for the conglomerate to reap the advantages of larger market access. This is because, the merger is not in the core business, but in between different businesses.

The objective of such mergers are largely to increase their market share, diversify their businesses, cross-sell their products, and to take advantage of synergies. In most cases, such mergers result in loss of efficiency, clashing of cultures, and a shift away from the core businesses.

Under these situations, it become difficult for the firm to earn obscene profits

Thus, the thesis that states that the increases in conglomerate mergers and concentration of the U.S. industry are responsible for "obscene profits." is not correct and is based on the theoretical notion.

Hence, I disagree with the given statement. The Lerner index takes the value close to 0, indicating very insignificant market power to earn obscene profits.