Buyouts and mergers that have the potential to reduce competition continue apace in many sectors and at different levels.
American Airlines is hoping to merge with US Airways, further reducing the number of choices for fliers. And the Canadian Pacific Railroad reportedly is being shopped around for sale to one of the large Class I railroads.
Closer by, the Twin Cities independent bank where we keep our accounts is merging with its two sister institutions. And for our farmland in southwest Minnesota, following the acquisition of several family-owned, ready-mix concrete firms, we have only one source of concrete for 40 miles around.
Is any of this really a problem, either for the economy as a whole or for buyers of the goods and services affected? The answer is typical for economists: It depends. However, the general answer is, yes, it’s a problem.
So if that’s the case, why doesn’t the government seem to be paying any attention to antitrust actions? Here’s where “it depends” comes in.
All other things being equal, fewer companies competing for the same general number of customers means higher prices for consumers. It also can mean less efficient use of resources. Moreover, while federal enforcement levels fluctuate in the face of dramatic decreases in competition in major industries like airlines, the government never really messed with local mergers of small businesses, including ready-mix plants or community banks. And it probably never should.
First, let’s think about why companies would buy up other firms to become larger. It may be the simple instinct of any business to get larger, particularly when compensation at the top tends to grow with company size. But there often are significant economies of scale. These may be driven by technological innovation. A computer system and back-office staff that can service one community bank with $50 million in deposits needs few additional resources to service several. This has been driving the consolidation of small-town community banks for more than two decades, and the process obviously has not run its course.
The same is true in other small businesses. Computer, accounting and other resources to handle one small concrete business with eight trucks can do the same billing, ordering, payroll and other administration for the equivalent of several.
Getting bigger also may enable a business to buy inputs at lower costs. A larger concrete business that buys several semi loads of Portland cement a day during the busy season can obtain lower prices than a single, smaller plant that buys one or two a week. The same may be true for diesel fuel and for capital assets, such as trucks and front-end loaders.
There may be efficiencies in specialization of labor.
In a small bank with a handful of employees, people have to wear many different hats. A small-business lending officer also may do compliance reports for regulators or supervise end-of-day postings and balancing. The computer specialist may have to work as a teller at busy times. Someone has to follow changes in regulation in addition to daily administration. Getting bigger changes that and allows specialization and development of expertise.
There may be changes in customer requirements. In the concrete company example, a typical house or small farm project might need four or five trucks of concrete over a week or more. But the base of a wind turbine may need 120 trucks full in one day.
Finally, becoming larger might be the only alternative to being gobbled up. The concrete plant consolidation in southern Minnesota began when South Dakota sold its state-owned Portland cement plant near Rapid City to a Mexican firm.
That corporation soon began buying up ready-mix businesses, working east along Interstate 90. As it advanced, at its eastern edge, it could be sharply price competitive. In its wake, in the monopoly area, it wasn’t.
As the acquisitions of this much-larger and vertically integrated corporation neared the Minnesota border, family-owned operations faced the choice of merging or being picked off piecemeal over the next decade.
US Airways and Canadian Pacific are in a similar situation, some industry analysts would argue, being smaller than major competitors. And community banks always are under pressure from the big boys, the largest of which enjoy substantial implicit subsidies from the federal government.
But again, it depends. In the airlines’ case, the smaller US Air is picking up a bankrupt American Airlines.
It could be argued that if American had gone out of business, the competition it offered would have been lost anyway. Its customers would have been shared by US Air and others. And since many regular airline customers are invested in loyalty programs, US Air’s acquisition of American could be seen as a positive.
Thus there are some sources of real efficiencies, and advantages — for society as well as for the companies involved — in some mergers. Is all then sweetness and light?
Not necessarily.
The owners of a merged company don’t necessarily set out to gouge their customers, who now have fewer alternatives. But as competition lessens over time, the incentives to raise prices, or to fail to control costs, are greater.
The degree to which this occurs can be industry-specific, however.
There is a limit on how long concrete can tumble in the drum of a truck before it loses quality. So my neighbors on the farm basically now have one source for concrete.
On the other hand, even if community banks continue to merge, retail banking remains extremely competitive. And technology, especially the Internet, is making many financial services more competitive and less capital intensive.
We have not bought home or car insurance from a local broker for years. We obtained a mortgage electronically with only a brief visit by a contract-closer to finalize the deal. We get farm and business loans by telephone and email. So although having to change our bank routing number on many bill-paying accounts is a pain, we don’t fear being gouged on fees or interest rates.
So given the many variables, should antitrust simply be tossed?
No, and the adverse effects on consumers of sharply decreasing competition in the airline industry is an example of why not.
The European Union is more active in forestalling monopoly abuses than our own government, and that puts some brakes on behaviors by U.S.-based corporations that operate in Europe. But the pendulum of public and political opinion will have to swing a long way back before much happens here.