Why mergers hurt the economy

A recent article in The New York Times on “How mergers damage the economy” missed an important point. It isn’t about having “fewer competitors to worry about” as the article says. It isn’t about collusion. It’s about market share.

Conservatives like to point out that a competitive market allocates resource and sets prices more efficiently than anything else. But they leave out what a “competitive market” really is. That “invisible hand” only works when no buyer or seller is big enough to affect the market.

In a perfect competitive market, if one supplier decides to charge more than everybody else, all the buyers will just go to other suppliers. That supplier will sell nothing, and the remaining suppliers will have to produce and sell an imperceptibly larger amount. Only in big exchanges, like the stock exchanges, the commodity exchanges, and maybe auction sites like eBay, are there that many small sellers and buyers and no big ones.

In fact (as the article points out), AT&T and Verizon each command about one-third of the market for cell-phone service. That’s a whole ‘nother kettle of fish. Suppose Verizon raises its rates. Its customers can’t all go to other suppliers, because the other suppliers just can’t handle a sudden 50 percent increase in traffic. All they can do is raise their rates and send the customers back to Verizon, and they all get excess profits.

After Whirlpool acquired Maytag (as the article also pointed out) the company now commands about three-quarters of the market for some household appliances. Their products are not expensive. But they cut quality. Cutting quality, like raising prices, boosts the supplier’s profits and lowers the buyer’s value per dollar. Their customers can’t all go elsewhere because their competitors would have to suddenly quadruple their output. They can’t. All of them, especially the higher quality producers, just raise their prices, sending most of the customers back to Whirlpool. Eventually they too can lower their quality, lower their prices, and match Whirlpool’s products. Go to any honest appliance dealer and they’ll tell you to keep your old appliance as long as you can. They don’t make them like they used to.

It doesn’t matter how many competitors you have. As long as you serve a sizable share of the market, you can raise prices, lower quality, and reduce service with impunity, knowing that you can’t lose your customers to the competition because your competitors can’t handle the load. That’s why market share is so important.

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