Mergers and Markets

I posted yesterday talking about my Pricing and Competition class from this past weekend.  I didn’t want to delve too deeply into the topic of mergers and FTC approval for “case studies” but we talked during the day about some specific mergers and merger attempts including Coca-Cola/Dr. Pepper, Sirius/XM, USAir/American Airlines, etc.

Consider the following:

”The proposed mergers could substantially reduce competition in the distribution and sale of carbonated soft drinks in the United States,” the commission said in a statement after the vote late this afternoon. A spokesman for the F.T.C. said it would seek a preliminary injunction in Federal court against the companies and would sue in court if the companies decided to go forward with their announced merger plans.

”These mergers were so outrageous and so harmful to consumers that even the Reagan Administration realized it had to oppose it,” said Senator Howard M. Metzenbaum, Democrat from Ohio. ”If they are allowed to proceed, they will permit two giants to dominate the industry and consumers will pay for it with higher prices.”

via F.T.C. ACTS TO BLOCK SODA DEALS – NYTimes.com.

Now this is the mid 1980s, so beverage choices were somewhat limited.  Snapple wasn’t big until the 1990s.  Energy drinks didn’t exist much.  Starbucks was a blip with six locations, all in Seattle.  So things were different.  But still I ask you:  how high could the price of soda get before people started drinking water?  Even in vending machines in hotels a soda can’t get more than $3 from people too lazy to walk next door to CVS, right?

Competition, when it falls away, can drive up prices.  But is that the government’s business to keep prices low?  I don’t think so.  And the higher soda prices got, what would happen?  More little companies would spring up (how hard is it to make cola or root beer?) because of the higher margins and drive prices back down.  If anything, the lack of a merger may have delayed innovation in beverages.  Who could know?

And the (took 17 months to finally approve) the Sirius/XM merger:

After fine-tuning to garner a majority vote of commissioners, the list of concessions demanded by the FCC will sand Sirius XM’s gears for years to come:

via The Lesson of the XM/Sirius Merger | Cato Institute.

Sirius and XM were the pioneers in the satellite radio industry.  I was an early Sirius subscriber, and found it a great product.  But between the two of them they had a very small part of the audio entertainment market…why was a merger delayed because they were the only two in Satellite radio?  It makes no sense to me.  Both could have gone bankrupt in the process while waiting for the FTC to approve the change, while terrestrial radio continued, as well as on line streaming, MP3s, etc.  Prices for their services are up from before the merger.  But in order to make money they probably had to go up anyway, and for them to agree to raise prices together would have been illegal.  So we could have lost the choice of satellite radio by the government delaying (or not approving) the merger, when it should be obvious to anyone that the two firms were not just competing with each other.

And since the government has such a great track record of increasing competition and helping prices drop, right?  Have you heard of Southwest Airlines?

Southwest Airlines was originally incorporated to serve three cities in Texas as Air Southwest on March 15, 1967, by Rollin King and Herb Kelleher. According to frequently-cited story, King described the concept to Kelleher over dinner by drawing on a paper napkin a triangle symbolizing the routes (Dallas, Houston, San Antonio).

Some of the incumbent airlines of the time (Braniff, Aloha Airlines, United Airlines, Trans-Texas, and Continental Airlines) initiated legal action, and thus began a three-year legal battle to keep Air Southwest on the ground. Air Southwest eventually prevailed in the Texas Supreme Court, which ultimately upheld Air Southwest’s right to fly in Texas. The decision became final on December 7, 1970, when the U.S. Supreme Court declined to review the case without comment.

via History Of Southwest Airlines.

Southwest spent three years in court before they flew a single flight.  Does this sound like pro-competition?  Southwest has done more than any government agency ever could to reduce the price of airline travel, by bringing something unique to the market.

The issue here isn’t whether the government makes the right choice or not in FTC merger approvals.  The issue is that people and firms should be free to make their own choices, and that the market will drive down prices and drive up quality, if we will let it.  When the government gets involved, it becomes political.  And freedom of choice in products is protected by the government staying out of the way, rather than denying companies the ability to merge in a way that can be more effective.

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