Economics: Antitrust - In Defense Of Mergers

 (Drivebycuriosity) - It seems that the Biden administration hates mergers & acquisitions. Senator Elizabeth Warren wants to prohibit "mergers valued in excess of $5 billion or those resulting in a market share greater than 33 percent total or 25 percent of any labor market" (cei.org ). Lina Khan, chair of the mighty Federal Trade commission (FTC), and Jonathan Kanter, leader of the Antitrust Division of the Justice Department, are suing companies who dare to buy other companies, including Meta & Microsoft.

According to Bloomberg "the aggressive stance on antitrust is already chilling merger activity among the country’s biggest companies, with some deals never making it past the boardroom as executives fear lengthy and expensive approval processes" ( gmtoday). A lot planned mergers got already cancelled.

 

             Harming Economy & Consumers

The zealots are harming the American economy and consumers. Mergers usually save costs and lead to efficiency gains. When for instance 2 bakeries in a neighborhood merge they will need just one baking oven and can cede one of their existing ovens and also some baking machines. The competition with other bakers induces the merged bakery to grant at least a part of the efficiency gains to their consumers and reduce prices. Lower prices force others to become more cost conscious & efficient in order to stay competitive. As a result the mergers creates efficiency and reduces prices on the whole market for backed goods.

The disputed mergers and the involved corporations are of course much more complex. But they create efficiency gains anyway. The combined companies can apply employees, machines & software more efficient & productive. For instance they can reduce overhead significantly because they don`t need 2 huge administrations. 

Mergers also raise the size of a company. Large companies are usually more efficient because they have lower average costs than small companies (economies of scale  corporatefinanceinstitute). For instance big and very efficient retailers  - like Walmart in the US and Aldi in Germany - are beneficial for consumers - especially low income households - because their low prices force other retailers to keep prices low as well. The more mergers, the more efficient & productive the whole economy will become.

Khan & Kanter claim that mergers reduce competition and lead eventually to monopolies. Their generalization would only then be correct if there are just 2 companies on the relevant market, which is very rarely the case (exception: 2 grocers or 2 banks in a small village). Even if a merger would create a monopoly with high prices the monopolist profits would attract other companies, like hedge funds, to enter the market.

But anyway, the Biden administration - and her antitrust enforcer - claims that a merged company will hike prices because it produces less than the two companies before, making their products more scarce and expensive, similar to a monopolist who produces less than he could. The antitrust enforcers ignore that the alleged production cut would invite other companies to produce & sell more, which will counter the alleged price hike.

The anti-merger crusaders also declare that mergers lead generally to higher prices because they reduce the number of competing companies on a certain market, a process called concentration. They overlook that a reduced number of companies might even intensify competition.

 

                   Fierce Competition 

History shows that a market with at least 3 big and strong competitors, who have lots of financial fire power, has more fierce competition than a market comprised of hundreds of small competitors which have weaker finances (Kantzenbach ). For instance there is a very aggressive competition between Walmart, Target and Amazon for e-shoppers or between Meta, Google, Microsoft & Amazon for advertisers. If Meta and Google - God forbid - would merge the competition could get even more intense because that new giant might attack her rivals Microsoft, Apple & Co even more aggressive.

The Bain & Company’s Technology Report 2021 analyzed all acquisitions of $300 million or more, totaling $150 billion, by Alphabet, Amazon, Apple, Facebook (now Meta), and Microsoft from 2005 to 2020. Bain observed that an acquisition benefited consumers with lower prices, increased access to innovations, or improved already existent products or services (cei.org). The acquisitions also increased competition by pressuring incumbents to innovate or by triggering more external investment.

Biden`s anti-merger crusader do not only diasregard efficiencies & prices, they also disdain the consumer. Judge Florence Pan, a Biden nominee, nullified the planned merger of the publishing houses Penguin Random House with Simon & Schuster. The judge agreed with complainant General Kanter (Department of Justice) that the merger might reduce the high advance payments for very popular writers, like Stephen King ( twitter). The publishers` defense that the merger creates efficiencies which lead to lower book prices and therefore benefits book buyers ( consumers) were of no concern for judge Pan and Biden nominee Kanter.

To make things worse, Biden´s anti-merger crusade also cost live! Lina Khan`s powerful FTC forced DNA-sequencing provider Illumina Inc. to divest their ownership of GRAIL Inc., makers of a multi-cancer early detection (MCED) test. The Khan "sadly ignores Illumina’s ability to use its resources to obtain regulatory clearances and bring GRAIL’s test to market more quickly, thereby saving many future lives" ( competitionpolicy).

                      Big Government

Conclusion: The Biden administration behaves insolent. Firms making acquisitions are acting rationally. Firms know their own business better than the generalist government antitrust agencies do, particularly when the relevant information is specific to the firm(s) rather than the market as a whole (Hovenkamp). As profit-maximizing actors that are responsible to their shareholders, firms will usually make acquisitions only if they anticipate profiting from them.

Apparently the Biden administration - and her antitrust enforcers - does nor care about consumers, efficiency and low prices. Kanter´s Department of Justice blocked a proposed merger between American Airlines and US Airways, claiming that the merger will reduce competition and hike flight prices throughout the United States. But contrariwise the US government forbids  foreign airlines, to serve American customers, constraining so competition and keeping prices high. 

The Biden administration is fighting mergers for ideological reasons and intends to replace big corporations by Big Government. The anti-merger crusade will make America more corrupt & expensive and is harming economic growth.