How will the recent wave of mergers affect the nation?
June 2, 1998
in this forum:
What is the correlation between mergers and the strength of the economy overall? How will the recent wave of mergers affect the consumer? Does the recent wave of mergers mean fewer rights for labor? In this emerging global economy, how do mergers affect third world countries? Is bigger better? Brad Beldar of Denver, Colorado, asks: How will the recent wave of mergers effect the consumer? Will we reap the benefits of economies of scale or will we be the victims of higher prices and less innovative products?
Professor Weston responds:
The question of the recent wave of mergers and the effects on consumers is important. The data record is pretty strong on this. When the merger movement started in the late 70s, we had double-digit inflation. Consumer prices were increasing at a rate of over 10% a year. After some 20 years of high merger activity, consumer price indexes have been in the 1-2% range. We have achieved virtual price stability. Interest rates measured by home mortgage rates in 1982 were over 15%. In 1998, they are running at around 7%, a drop of more than 50%.
All kinds of products are being improved: autos, TV sets, all kinds of household devices, a rapid increase in innovative products of all types. Prices of PCs have dropped so that one can now buy a PC for under $1,000 with significant powers for word processing and surfing the net.
One should not claim all these benefits from mergers alone. The benefits come from technological change, international competition, improved information systems. These are the basic forces behind mergers. But mergers have been an efficient vehicle for transmitting the benefits of these forces to consumers. Mergers reflect basic forces that have been good for consumers.
Professor Adams responds:It is a tried-and-true maxim of political economy that mergers which lead to corporate concentration and market control inevitably harm the consumer. An outstanding illustration is the impact of the merger movement in the U.S. airline industry.
When the industry was deregulated in the late 1970's -- a phenomenon which Mr. Wasserstein during our program on the NewsHour applauded as being the harbinger of a new era -- the major airlines embarked on a massive consolidation program. With their control of gates at major airports, their control of the reservation systems, their hub-and-spoke operations, their mergers, and their predatory tactics, they gained virtually impregnable control of airline markets.
Consider, for example, that on a quasi-monopoly route from Cleveland to New York, Continental will charge for a one-way ticket a fare of $423. On the route from Cleveland to Baltimore (almost the same distance), the one-way fare is only $83 -- with no restrictions. Why? Because on the Cleveland-Baltimore run, Continental has to face the vigorous competition of Southwest Airlines.
Another current example is telecommunications. The theory behind the Telecommunications Act of 1996 was to promote deregulation by fostering competition between the long-distance telephone companies and the Baby Bells. No such thing happened. Instead the Baby Bells started merging with each other while successfully blocking entry into the local market by AT&T, Sprint, MCI, etc. Nynex merged with Bell Atlantic creating a company that controls service from Maine to Florida. Southwest Bell acquired Pacific Telesys and now is going after Ameritech. Is this the road to competition or monopoly. Will deregulation -- in the absence of competition -- be a boon to consumers?
It should not be surprising that markets where monopoly or oligopoly hold sway, the consumer will not be as well served as he/she is under competition.