Mergers Between Two Firms

Ethan Harry Wood

Mergers between two big firms can have widely varied effects on the consumer. Research suggests that without checks and regulations, mergers can lead to the transformation of a competitive market into an oligopoly or monopoly due to underlying industry conditions. Mergers often occur in order to achieve economies of scale which result in increased efficiency and cost savings or to increase market share. These types of mergers are known as horizontal and vertical mergers respectively and often result in the combined entity creating a monopoly or oligopoly, provided the two companies are large enough. Formations of oligopolies and monopolies are generally considered bad for consumers, to such an extent that government organisations across the globe, such as the US Department of Justice and the Federal Trade Commission are tasked with approving mergers of large companies. Monopolies and oligopolies are viewed this way because they have no competitors; either because they themselves dominate the market or a small number of companies that dominate the market collude together. Consequently, they have a greater ability to: inflate the price, sell worse quality products and stop innovating as there is no need to entice customers given the lack of other options within the market. However in rare cases monopolies can be created for the benefit of consumers, these monopolies are usually created in conjunction with governments but not exclusively; private monopolies that regulate prices, eliminate inefficiency and as seen in the Concourt Model where both modest and large efficiency gains benefit the welfare of consumers by lowering entry barriers or lowering prices respectively.

When a merger between two large companies within the same industry occurs it can reshape the global market, a very prominent example of this was the merger between Pfizer and Warner Lambert in 2000, valued at approximately $100 billion. This acquisition meant they had full control of Lipitor; a cholesterol-lowering drug which went on to become the world's best-selling medication. Due to the merger, Pfizer had a stronger global presence and consequently a stronger global distribution network, which benefited consumers by providing more choices on a larger scale. Regardless of this, the merger could be argued as an overall detriment to consumers, as despite Pfizer claiming that the idea of their research budget being reduced was ridiculous, they cut their arthritis drug trial due to the merger transition and a study by Centerwatch determined the following 3 years of a merger between drug companies have reduced spending on research and development. Another case study example is the merger between Amazon and Whole Foods, which had a transformative impact on the US grocery market in particular and ripple effects elsewhere. The merger allowed Amazon to employ its logistical capabilities and customer data in order to enhance the Whole Foods operation and expand its reach. The combined resources of the merged entities created a market leading: infrastructure, data analytics, delivery speed, online and offline integration. These factors meant a high barrier to entry had been created and as a consequence, other smaller grocers and grocery startups were unable to compete with Amazon's newest technologies such as Relay, arguably its biggest supply chain innovation yet. Relay is a trucking app that haulers can use to check with Amazon before picking up or dropping off a package allowing for faster process times; whilst it currently is only used for delivery to and from warehouses there are plans in place for a greater incorporation into every aspect. This both benefits and disadvantages the consumer as Amazon’s innovation has resulted in faster service but causes newer startups to struggle to compete, reducing choices for the consumer and potentially leading to a monopoly.