Why Do We Encourage Mergers of Large Companies?

BY busadmin  February 5, 2009 at 10:26 AM EDT

Fanny May; AP photo

Question/Comment: We live in a time of unparalleled economic crisis; a time when failure of a large company such as GM or a large financial institution could have catastrophic effects throughout the county and beyond.

Why does our government allow and even encourage mergers of large companies into mega-companies? Companies that simply are too large and “can not be allowed to fail” since doing so would be disastrous for the entire country.

It is rather like putting all your eggs in one basket and hoping it will not break.

Paul Solman: The rationale is “economies of scale” — the efficiencies that supposedly come with greater size. Think of how much you might save on IT and PR and even the CEO if two companies become one. Think of making thingamabobs in a factory with the very latest thingamabob-making machine compared to making them one by one in your garage. Think of the volume discounts Wal-Mart can get from suppliers compared to a corner store.

There are two problems with this reasoning. First, suppose it is right. Well then, the largest firm becomes more efficient than its competitors in the industry, can price its goods and/or services lower than the competition, should eventually undercut all rivals, and wind up with the industry to itself. Become a monopoly, that is.

The other problem is that “economies of scale” are forever fighting “DIS-economies of scale” – the sheer cumbersomeness of size: the bureaucracy, the alienation, the IN-efficiencies.

These days, though, you are right to point to another motivation: if my company is big ENOUGH, the government can’t LET me fail.