Topic TD Canada What is governemnt regulation like in your company\'s industry?
ID: 1225603 • Letter: T
Question
Topic TD Canada
What is governemnt regulation like in your company's industry? Does the government employ any regulation designed to ensure that competition is healthy or the rights and welfare of consumers is protected. Would you support governments breaking up companies if they become too powerful? Why or why not? Be sure to discuss how consumer and societys welfare are impacted by firms that exhibit market power? Do you think that governments should always, as a rule, reduce market power of firms that exhibit market power (in order to protect consumer welfare) or should firms be able to grow to be large and power (such as Microsoft)? Would breaking up large companies as a rule eliminate incentives to work hard
Explanation / Answer
1) Take aviation industry for example. In this industry the government is vigil enough to take on mergers and acquisitions that are aimed at increasing monopoly power.
2) Government uses various techniques to check mergers and acquisitions. To measure the industrial concentration and have a closer look on mergers, an index called the Herfindahl-Hirschman Index is used. Besides, concentration ratio and Rothschild index are also used intermittently.
3) Government must keep strong regulation on mergers since consumer’s interest is exploited by merged monopoly or oligopoly more than often. Smaller the number of firms that dominate a market, greater is the likelihood that the firm will avoid cutthroat competition and can succeed in charging higher price. There is plenty of evidence that suggest that increase in the concentration ratio promotes higher prices.
The aviation industry saw American Airlines and US Airways proclaiming about their merger. The merger has made the entire entity the biggest in the world with $39 billion in revenue. The new American Airlines Group (AAG) has made tremendous progress in conducting its operations. AAG has achieved certain vital landmarks. AAG has been conducting operations at around 60 airports, and providing some particular cabin services including food and beverage efficiently.
4) Mergers are advantageous economically to an extent, in the short-run, because they tend to squeeze the market available to other players. They might also acquire the features of oligopoly. This in turn, reduces the cost of operations dramatically. Because mergers allow two firms catering different production functions each at a separate cost structure to produce them at a less aggregate cost. Hence mergers are done to avail the cost advantages provided by the economies of scope.
However, if the merged firm becomes a monopoly, the price faced by the consumers is likely to be higher. A monopoly charges a higher price and produces a lower quantity in relation to a competitive firm. The reason is that the monopoly faces a downward sloping marginal revenue curve while a typical competitive firm faces a horizontal one.
Hence, it depends on which side the pendulum moves when a merger is taking place. In the United States, we have the Department of Justice and the Federal Trade Commission that keep a check on potential mergers.
Overall an industry with a post-merger Herfindahl-Hirschman index value of below 1500 is considered unconcentrated. In an extreme case, If HHI in an industry exceeds 2900, it suggests that the industry is highly concentrated. In that case if a merger is going to occur which raises HHI by 225 points, then the FTC and DOJ might challenge a lawsuit against such merger. However with such merger, some other factors are also scrutinized like economies of scale, economies of scope, and the ease with which there is an entry possible in the industry.
5) It should not and it cannot be practically done since most of the markets are imperfect with firms looking for new innovational practices and products to survive. In that case, a protection, as in pharmaceuticals, must be necessitated, rather than avoided. Even if trademarks, patents, grant monopoly power, the reduction in the benefits of current consumers can be more than offset by the increase in the benefits potential or future consumers.
6) It would definitely. Breaking up a large company will necessarily increase cost of production and will reduce profits. This is not going to increase welfare of the consumers, instead, it will create some additional problems like discrepancies in the supply chain, besides surging prices.