Corporate Mergers Are Going to Cost You, The Consumer
From dollar stores to media giants, American corporations seem to be suffering from merger mania. In March, Heinz announced that it would buy Kraft Foods. Comcast is in the process of acquiring Time Warner Cable, a $45 billion deal that should be complete by the middle of 2015, according to the Wall Street Journal, pending approval by both the FCC and the Justice Department.
In January, Dollar Tree bought discount chain Family Dollar for $8.5 billion, after beating out a rival offer from competitor Dollar General. Office supply giants Staples and Office Depot are also contemplating a union. (Office Depot already merged with another major player in the office supply space, Office Max, in 2013.)
Merger announcements often come with a lot of hand-wringing over the possibility of increased prices, reduced competition, and growing corporate monopolies. Those are all valid concerns. But mergers and acquisitions are also a fact of business life, and they’re not automatically bad for consumers.
Take the airline industry, which has undergone a lot of consolidation in recent years, as major carriers like Delta and Northwest and United and Continental merged. A 2014 report by the Government Accountability Office (GAO) found that despite those recent mergers, the number of airlines serving both large and small markets didn’t change all that much. In other words, competition didn’t decrease because of the mergers, in part because as big carriers combined operations, low-cost airlines moved in to new markets, expanding options for flyers. Airfares did go up over that same period, however, as airlines reduced the number of flights and added on extra fees.
But there’s also plenty of evidence that consumers lose following mergers, at least in some situations. A 2012 study by the Robert Wood Johnson Foundation found that hospital consolidation increased prices, sometimes by upwards of 20%. When the Federal Trade Commission (FTC) looked at the effect of grocery store mergers, it found that consolidation often led to higher prices for consumers. Not surprisingly, prices increased more in markets where there was not a lot of competition prior to the merger. Internet service providers also tend to charge more in markets where consumers have no other alternatives.
“Merging companies always say that they’ll save money and bring down prices,” Albert Foer, the president of the American Antitrust Institute, told Time. “But the reality is that they often end up with monopoly power that allows them to exert incredible pressure in whatever way they like.”
Mergers can have more subtle effects as well. Job losses often come on the heels of mergers, as companies trim duplicate positions and consolidate operations. Family Dollar expects to close about 300 stores following its merger with Dollar Tree. In addition to lost jobs, that could leave consumers in some areas with fewer options or force them to travel further to shop at the stores they prefer. Yet others have speculated that the combined chain will emerge as a rival to Walmart, which might be a boon to consumers.
The FTC tries to protect consumers from the worst effects of consolidation by prohibiting mergers that will significantly reduce competition or create a monopoly. The vast majority of proposed mergers reviewed by the FTC are given the go-ahead. About 5% raise red flags, though these mergers are often approved with some concessions. Often, companies agree to spin off some of their assets to avoid anti-trust concerns, as cigarette makers Reynolds and Lorillard want to do as part of its proposed merger.
Still, the end result of big corporate mergers often seems to be less choice and an inferior product. Want proof? Just head to your local liquor store. If you want to pick up a six-pack, it may seem like you have a lot of options. In reality, a significant number of those beers are produced by just a handful of companies.
In some cases, major players in the industry, like AB InBev, are adding brands to its stable and then changing the way they are brewed – or so claim beer aficionados – in order to cut costs or appeal to a broader range of tastes, as reported in Bloomberg. The result, some fear, is the illusion of choice, with dozens of different beers but little true variety. As in any highly consolidated industry, what consumers seem to end up with is fewer choices about where to spend their money and which products to buy.