Market Imperfections and the Role of Government

Reasons to consolidate/merge varies, from size - creating a bigger size and being the biggest from that perspective, to change - a critical policy to alter the competitive landscape. Some are even merging for global purposes, that is, deploying resources and moving them around to meet diversified needs in different parts of the globe. But the fact remains that merging can either be horizontal, where two or more companies having no common grounds in terms of input and output consolidate; or vertical, where a company producing the raw materials and the company producing the finished products become one. Every consolidation faces issues however. These issues may range from boundaries and market concentrations to profitability and competition tendencies. Some of these issues will be discussed in this paper.

To Consolidate or Not

When companies merge, various financial assistance (specifically from the government) come their ways, especially in cases wherein there are under-capitalized companies involved which need either consolidation or acquisition to prevent closure, accomplish higher lending competencies, achieve economies of scale, broaden the horizon for risks and improve the quality of their services. These are the incentives in consolidation. Also, these companies may attain the most sought-out global expansion and competition through merging. Other incentives may come in extension of permits and tax exemptions.

Market Concentration: A Boon or a Threat?

A market system/structure (such as Oligopoly) allocates goods and services through the means of demand and supply. The consumers obtain their goods and services in the market depending on their ability and willingness to buy. It is a common knowledge that in terms of allocating goods and services, a market system is more efficient than the government. Thus, market concentration can be an advantage to the consumers when the market structure allows equal distribution of resources. In the case of Oligopoly, wherein there are few firms which dominate the market and where products are either identical or differentiated, market concentration then now becomes an advantage since competition will be optimal, making products more innovative and less expensive for the consumers.

On the Oligopoly Market Structure

An oligopoly market system can be very beneficial, both to the consumers and producers because it prevents the market into going into a transformation of becoming rigid, conventional and unimaginative - provided that common standards are being used in rapidly technological advancing industries. The main reason is that, businesses will always make sure that their products are innovative and efficient in the long run, so others may not leave them behind.

Conclusion

It's been known that the more concentrated the market, the lower the prices that a supplier or producer can charge because market concentration leads to price wars. A consolidation of firms then is a threat to other firms especially if the companies that merge are already of big names in the industry. There are so many reasons all right to merge, some may be hidden behind the walls of the conferencing mergers, but the fact will always remain, these reasons may not always be in the advantage of the consumers.

References

1. Scale Economies and Synergies in Horizontal Merger Analysis
Retrieved February 9, 2008, from http://repositories.cdlib.org/cgi/viewcontent.cgi?article=1011&context=iber/cpc

2. Bright Side and Dark Side of Mergers and Consolidations (2002.5.11)
Retrieved February 9, 2008, from http://www.rieti.go.jp/en/special/economics-review/006.html

3. The Benefits of Oligopolies
Retrieved February 9, 2008, from http://samvak.tripod.com/pp159.html