Policies to Control Merger and to Prevent Collusion - Assignment Example

Explain the underlying rationale for policies to control merger and to prevent collusion. Why do governments often decide to regulate mergers on a case-by-case basis, but to prohibit collusion? Illustrate your answer with cases with which you are familiar Name: Date: Institution: Title: Introduction A merger is beneficial to the merging companies in many ways. The combination can strengthen and expand the local economy through increased production. Some may even lead to better, cheaper and efficient methodologies of production of the products. However, these mergers have underlying disadvantages that they pose to the consumer. For instance, when the merging companies have a dominant force the control the markets they operate in, the result could be that the consumer is deprived through high prices of commodities. To stop this phenomenon from occurring; different governments, intergovernmental organizations and trading blocs have devised policies that regulate the occurrence of these scenarios in different states. These policies aim at protecting the consumer from exploitations through a regulated framework that systematically monitors the effect of any mergers in the jurisdictions that the policies operate. Collusion, on the other hand, is an illegal agreement to control the market by two or more firms by limiting fair competition between the firms. It involves the achievement of objectives that may be forbidden by government like high prices that do not match the quality of the goods that are sold. Indicator of this kind of illegal activity includes the exchange of information between firms, high and uniform prices of commodities and notice of change of prices to the consumer, which is usually done in advance. In many jurisdictions, this kind of trade illegality is prohibited and punishable under the codes of conduct available. In this essay, the rationale that underpins the policies that either prohibit collusion or regulate the mergers that need to be formed by different companies is discussed. It also reviews specific examples of policy frameworks that have been developed in different jurisdictions in a bid to understand the rationale that is behind the formation of these. Rationale for the policies that regulate mergers and prohibit collusions In most jurisdictions, the policy frameworks that govern the mergers and prevent collusions are referred to as antitrust laws or competition laws. The policy frameworks main duty is to observe and monitor the market that is under the jurisdiction. This is done to ensure fairness in trade by the players in the markets. They also ensure that the markets are controlled forces of demand and supply. The overall intention of the policies is to provide regulation of the market. The meaning of regulation is described in (Norman and Thisse 2000, pp 96) as a benchmark that controls the pricing policies and protects the consumers and other players in the industry from prices that are discriminatory. In this study, the common rationale of the policies has been identified as that which seeks to prevent the abuse of power by the large corporations in the market. The consumer has been identified as the most probable victim of this abuse of power by the corporations. It then gives the example that if this regulation framework is not in place the large corporations can exploit the monopoly to exploit the consumer. Collusions can be classified in to two categories; that is; vertical collusion and horizontal collusion. Other studies identify the classes of collusion as tacit and explicit. In vertical collusion, the price of a commodity is set by the players at the different stages of the distribution chain. This is repeatedly undertaken at the different levels from the producer to the consumer. On many occasions, the consumer is not involved in the agreements and has just to take or leave whatever price that is offered. In vertical price collusion, different policies are of the opinion that it is a per se violation of antitrust regulations. This form of collusion is prohibited with the argument that the permission to implement the arrangement would lead to the reduction of the welfare of the customer. This based on the fact that vertical collusion is feared to raise the price of a single commodity at many levels. As such if there are many middle men in the business the impact is an acute rise of prices and subsequently a high price level (Roy 2007, pp 12). Vertical mergers are a subject to regulation too. The reason behind this regulation is the effect that the merger will generate in the market. For instance, if the negative effects of that merger super the benefits, then the regulator will flag that merger as illegal. A perfect example of this illegality was in the Supreme Court ruling in 1972. In this decision, the Supreme Court ascertained that the acquisition of Ford from electric Autolite company of the name Autolite and associated which were to manufacture spark plugs was illegal (Viscisi et al. 2005, pp 254). The acquisition meant that the Ford had purchased and would own about ten percent of the total industry output. However, the basis of the decision was on the total amount of foreclosure that the merger would cost the market. In this case, the rationale that underpins the framework used to arrive at a decision is the foreclosure rate or loss of job and the threat of monopoly. Social welfare also plays a role in this decision as evidenced with the judge’s decision to rule that under that amount of loss of income, the decision remains illegal. The repercussions of the decision led to a considerable improvement in the policy framework in the USA that concerned vertical mergers. Newer rules were put in place that governed the challenge of such mergers. The rationale that was set for such challenge included; if the merger had negative horizontal competitive effect, barrier to entry of new players in the industry and the detection of collusion within the merger (Viscusi et al. 2005, pp 255). Although is important to provide regulation so as to achieve the benefit of fair competition; some studies are of the opinion that a very strong control would be detrimental to the economy (Clarke 2014, pp 42). In this study, the rationale that should be adopted in the design of regulatory policy is that which gives considerable leniency to actions taken on the interest of the public. The proposal it gives is for a framework that allows both producers and consumers to work a compromise on the acceptable level of collusion to save on the costs involved on investigation and prosecution. The proposal is deemed to guard against accidental prosecution of firms that have not colluded and setting the economic environment freer for entry. However, it also warns of the fact that the under regulation could lead to high consumer exploitation by global dominant corporation (Clarke 2014, pp 43). It is, therefore, important to note that even in this case of tampered regulation, the rationale behind the policies remains the protection of the consumer and other corporations from the adverse effect of imbalanced mergers. Purposes for merger regulation Before a merger is effected, it is a basic requirement that the merging partners inform the relevant governmental organ that is in charge of the regulation. The aim of this Pre-merger Notification is for the purpose of the government to allow the authorities screen the terms and effect of the merger. This will result to the possibility of disqualification or modification of the merger in order to prevent potential economic consequences. Upon screening, the mergers that are seen to have negative competitive aspects are prevented, others are modified with the intention of avoiding negative economic effects and good mergers are allowed (Imus 2007, np). This screening is done both at national and international level. The underlying fact here is that mergers have both negative effects that can be depicted by the monopolies and positive side that is represented by synergy (Sugden 2013, pp 141). The main reason behind the importance of this screening can be a number of reasons related to the nature of mergers and the resultant effect on the economy. In the United Kingdom the mergers were presumed as dangerous unless the firms that were merging had shown that the reasons were purely noble (Sugden 2013, pp 144). As opposed to individual public liability companies, mergers are seen as inherently public in nature. As such the spirit of anti-competitive conduct which includes the covert cartel conduct that is difficult to realize beforehand is part of its characteristics. This means that the spirit of anti-competitiveness could be engrained in the formation and that pre-notification of this conduct is only possible through screening (Clarke 2014, pp 43-44). It is only logical to perform a screening and avoid disastrous consequences to the economy before they happen. A merger of equals is one form of merger that has been found to have no benefit to the economy. In this merger, the volume of sales greatly reduces, and there is no growth in labor productivity. In fact, this form of merger can only serve to decrease the level of employment due to redundancy of labor and the need to exploit economies of scale (Itami 2010, pp 262). Due to this aspect, the government through the agencies that seek to expand the economy and reduce unemployment will have to regulate which types of mergers those are allowable through regulation. To demonstrate the effect of the merger of equals, Kaplan (2000, pp 151), illustrate the impact of this kind of merger using the example of Comerica and Manufactures in 1992. In this merger, the cost during this year was quite extensive as described by the study. However, the new entity found substantial growth in the next few years as compared to the old Kent banks performance within a similar period. Critics would be quick to identify the possibility that the old Kent bank could have grown even better during this period. However, it is worth noting that it would have surpassed the growth of the newly formed entity as a result of the dynamic nature of the macro-economic environment. The study also fails to indicate the use of the significant cost that was incurred by the merging partners. It is, therefore, safe to argue that the initial argument that does not favor the merger of equals is affirmative. Due to this, the government should impose a regulation on such mergers to protect the short and long-term effect on the economy. Due to the covert nature of cartels, which is a likely characteristic of mergers, it might be possible that the merger can grow to levels that it monopolizes the industry in which it is operating. If the merger grows at this level, the consumer is at a risk that emanate from different sources. First, the cartels that do not have the interest of the consumer at heart are likely to decrease the supply of goods to the market and so as to create artificial demand. The reason for this demand is to increase prices and make a profit regardless of any circumstance (Dwivedi 2006, pp 246). The result here is a social problem where the cost of living is likely to escalate. Another problem that arises from a monopoly is the power struggles. In a monopoly, the struggle to remain the sole provider of a commodity or service is on a daily basis. This involves the use of resources to influence political powers to prevent entry of other players and the struggle to keep prices of commodities up. Due to this fact, the social responsibility of the firm to the community can be easily neglected due to the channeling of resources in a bad direction. The result is a situation where even the quality of goods or services is compromised (Dwivedi 2006, pp 248). In a responsible business situation, the quality must be assured for the goods to be acceptable to the population. The government through its standards agency has to ensure that the products that are circulating in the market are safe for consumption and that the same products meet the standards that are expected of them. This is one other reason that the government has to root out monopoly since the temptations to the officials that are in charge of these departments are likely to be swayed into crime. Apart from the consumers, the producers are also put in some trouble. In the case where the monopolist is the sole buyer of the produce, the result is a situation in which all the suppliers and buyers have to agree to the prices that are dictated by the monopolist. As a result, the monopolist can exploit the distributors or producers for the advantage (Jayaram and Kotwani 2012, pp 38). A monopoly also limits the consumers’ choices and the chances of innovation that can result from competition. This relates back to the poor quality of goods in the market, and the consumers have no choice, but to make do with the poor quality off goods. Why the government prohibits collusion The difference between collusion and mergers is quite distinct. In collusion, the general motive of the participants is to run an ulterior motive while presenting a different face altogether for the purpose of profiting. As discussed earlier, the indicators of collusion are explicitly related to prices of commodity. That is in both vertical and horizontal collusion the price of a commodity is raised systematically with the agreement of the suppliers or distributors. The reason why the detection an investigation of this form of illegality is difficult to identify or determine using an ordinary investigation is that, in a market, the prices can be largely similar but the negotiators and players are difficult to identify (Plott and Smith 2008, pp 171). The only probable case where the regulators can easily identify the vice is in a case where the industry is quiet stable, and the prices are not volatile. In this case if any traders raise prices with the ulterior motive of quick benefit, then the regulators would easily identify (Polinsky & Shavell, 2007). In vertical collusion or horizontal collusion, the main agenda of the players is either to benefit rapidly or push competitors out of competition (Filho 2012, pp 168). For instance, in a situation where a number of players are selling homogenous goods, but they set different prices for the goods. If other players wish to drive one of the competitors out, the best possible means will be through horizontal collusion of the other member of the team but with substantially lower prices. The impact of collusion in the modern business environment is far severe as compared to merging. While the process of merging could be solely noble, in collusion the only outcome is that the firm’s intention is to gain profits that are from deceit of the customers and the general public. In this case the only intention of the government is to stop and not control since it is a vice. Conclusion In the past mergers were a means of strength that meant that small and medium sized corporations found the strength to undertake even more challenging projects together. For labor-intensive projects like construction projects, teaming up through mergers would still be ideal up to now. However, with the emergence of cartels that would unscrupulously benefit from the ventures, the different jurisdictions have devised means to eliminate the negative impacts of the cartels to the economy. The introduction of regulation has meant that the different trading blocs or nations organize a framework that will look into the different claims of illegal mergers that could have adverse negative effects to the economy. The aim of such regulation is to protect the consumers from exploitation by the merging firms and ensure that the social welfare of the consumer is protected at all times. On other occasions, the protection is extended to small market enterprises and upcoming industries against collapse due to a stiff and imbalanced competition. This is what informs the rationale behind the formation of the policies that safeguard the formation of mergers and prohibition of collusions. The government has to have a significant control over the merger process. To do this, all companies wishing to form a merger are required to inform the government through a pre-merger notice. This enables the relevant agencies to use the appropriate mechanisms to gather the relevant information for screening the corporations’ intentions of merging and the potential consequences that the merger has for other firms and the overall economy. The main causes of disqualification from a merger include the inability of firms to state the goals of their merger clearly. In addition, the detection of some possible level of collusion by the two firms and the overall nature of the merger are also the main causes of disqualification from merger. The merger is only allowed only after a considerable proof by the regulator that the effects of such merger would not be adverse to the economy. Monopoly and its effects on the economy like the socio-economic aspects of life should not be allowed to crop up due to mergers. These negative effects are difficult to mitigate since the corporations are in a constant fight to retain the position as the sole provider f the goods and/ or service within the industry. On the other hand, collusion is a more difficult to detect. However, the investigating authorities should be on the lookout for any indications of the vice. Timely correction of the vice on will save the consumer a great deal in terms of extra unwanted expenditure. Finally in regulation, it is important for the policy makers to devise mechanisms that do not make the economic environment so stringent that investors would fear the costs of investing in the economy. The cost of administration of the vices should also not be overburdening to the taxpayer, but the under regulation could also result in the problem of cartels and unscrupulous businesses taking advantage of consumers and other players. Reference list NORMAN, G., THISSE, J. F., & PHLIPS, L. (2000). Market structure and competition policy game-theoretic approaches. Cambridge [etc.], Cambridge University Press. VISCUSI, W. K., HARRINGTON, J. E., & VERNON, J. M. (2005). Economics of regulation and antitrust. Cambridge, MIT Press. IMUS, N. W. (2007). Premerger notification practice manual. Chicago, ILL., ABA Section of Antitrust Law. ROY, C. (2007). Efficiency and extremities in an open ended universe. Alabama. Ludwig Vonmise’s institute press. SUGDEN, R.(2013). Indusrial regulation: a framework and exploration ITAMI, H. (2010). Dynamics of knowledge, corporate systems and innovation. Heidelberg, Springer. KAPLAN, S. N. (2000). Mergers and productivity. Chicago, University of Chicago Press. DWIVEDI, D. N. (2006). Microeconomics: theory and applications. New Delhi, Pearson Education. PLOTT, C. R., & SMITH, V. L. (2008). Handbook of experimental economics results. Amsterdam, North Holland. Jayaram, R. and Kotwani, R. N. (2012). Industrial economics and telecomunication regulations. New Delhi. PHI printing press. POLINSKY, A. M., & SHAVELL, S. (2007). Handbook of law and economics. Amsterdam, Elsevier. FILHO, C. S. (2012). A Legal Theory of Economic Power Implications for Social and Economic Development. Cheltenham, Edward Elgar Pub. Read More