While mergers and acquisitions are sometimes good for business — expanding the customer base and consolidating expenses — they aren't always in the best interest of consumers.
Mergers often leave higher prices in their wake, especially when they involve large consumer product companies. Predicting which mergers will put the biggest squeeze on consumers isn't easy, but antitrust regulators need to do more to protect the public from merger-related price inflation, according to research conducted by Terry economics professor Matt Weinberg.
Weinberg examined micro studies of individual mergers, looking for the effects on consumer prices and for indications that U.S. policies governing mergers are either too strict or too lenient. Of the 14 case studies he reviewed, 11 mergers resulted in price increases of between 3 and 8 percent within a year of the mergers. Not only are the merging parties likely to raise prices, says Weinberg, but in some cases other competitors in the market increased their prices as well.
"In some cases, higher prices actually preceded the mergers," says Weinberg, who found that some firms raise their prices after they announce their plans but before government approval. "This is particularly true in industries like banking and airlines, where customers have to endure hassles or extra expenses in order to move their business elsewhere. Because consumers oftentimes find it costly to switch products, an acquired firm will not have the incentive to lock-in future customers through low prices."
Firms merging with direct competitors also may be able to raise prices without feeling the typical backlash; those customers driven away by higher costs may switch to the competitor and soon-to-be ally. Weinberg points out that when Pennzoil and Quaker State prepared to merge their motor oil businesses in 1998, Pennzoil raised its prices knowing that some customers might switch to Quaker State. But since the two competitors were likely to be owned by the same company soon, Pennzoil's customers wouldn't be lost for good. In the end, Weinberg says the Pennzoil-Quaker State merger resulted in an overall price increase of 5 percent.
Of the thousands of "intention to merge" notices filed with federal official each years, the vast majority represent transactions that are so small they don't warrant a government review. When deciding whether to approve larger mergers, officials with the Federal Trade Commission look at market share data and interview experts in the market about the potential effect on consumer prices. Government regulators pay particular attention to mergers within already concentrated markets — especially when they involve a market's two largest competitors.
"If the estimated price impact is near the top of regulators' comfort level, which appears to be at about a 5 percent increase," says Weinberg, "then the government will ask for additional information. Between 1988 and 2005, about 3.8 percent of merger requests went to this more intense level of review, and roughly 65 percent of those were blocked or required divestiture. While it might be the case that most mergers that are passed do not harm consumers, some recent consumer product market mergers that looked like they were close to being blocked did, in fact, result in higher prices."
With this in mind, Weinberg thinks that policies governing borderline mergers should be stricter. This can be done, in part, by improving the models that the FTC and the Department of Justice use to estimate a merger's price impact. The models — which take into account such factors as customer sensitivity, production costs, and interaction between the firms — are complex formulas whose conclusions do not always reflect market realities, especially when it comes to consumer patterns, says Weinberg.
In some cases, the current models have wrongly predicted an increase in prices — and perhaps required unnecessary scrutiny as a result. For instance, in the 1997 merger between Log Cabin and Mrs. Butterworth's, leaders in the syrup market, the models estimated a 10 to 15 percent price increase. In reality, the merger produced no price changes. In other cases, however, the models underestimated how much prices would increase. In the Pennzoil-Quaker State consolidation, the models did not foresee the 5 percent price jump.
"They don't want to block all of (the borderline mergers), but it's a tradeoff," says Weinberg. "Regulators have to balance the benefits of cost decreases that may be passed through in the form of lower prices against the increase in monopoly power that will cause prices to increase."
Weinberg says there is a need for studies that examine the long-term effects of mergers. He points to a study of the Italian banking system, which found that prices immediately increased 13.5 percent due to monopoly power, but then fell 12 percent over the next two years because more time was needed for cost reductions to be realized.
Weinberg believes his research can have a practical application for future mergers, and he is currently working with someone at the FTC to help improve the price modeling used in analyzing potential mergers.
"(Government regulators are) really concerned about it," says Weinberg. "I think they do good work and the goal is to improve something that's hard to do."