Government Intervention in Monopolies, Mergers, and Acquisitions - Example

GOVERNMENT INTERVENTION IN MONOPOLIES, MERGERS, AND ACQUISITIONS By Location Government intervention in monopolies, mergers, and acquisitions Governments usually play a very important role in their respective economies as they have the ability to make or break the same. One of the important roles played by governments is controlling and regulating economic activities within their territories. Controlling and regulating economic activities is important in making sure that fair competition is promoted. When competition is fair the market usually functions better. It also contributes to the efficiency of the markets individually and enhances the competitiveness of the country in the international markets. Some of the activities that might be a threat to fair competition include: collusion, mergers, takeovers, and natural monopolies. These activities must be controlled and regulated if in any case there is to be fair competition within an economy. This paper will review the role governments play in controlling and regulating collusion, mergers, takeovers, and natural monopolies. A merger is referred to the process through which two or more business organizations combine and become a single entity. Mergers can either take place through consolidation or absorption. Absorption takes place when two or more business organizations are combined into a single company that already existed. A merger through consolidation takes place when two or more business organizations combine leading to the formation of a completely different company. Takeovers take place when a business, organization or investor buys a business organization, but the company that is being acquired does not change its name but continue operating with the name it used previously. Collusion is a secret agreement between competitors in a given industry with the aim of dominating the market and having absolute control over the market. Natural monopolies refer to a type of market that results from a market scenario whereby the average cost of production reduces throughout the relevant range of product demand. In this case the cost of production includes utilities such as water, power, electricity, telephone, and gas. Someone might ask why the government would be interested in regulating and controlling economic and industrial activities within their territories while most constitutions gives the freedom of economic activity. The answer to such an inquiry would be the fact that the freedom provided in the constitutions does not only apply to the strong and connected investors and business organizations. If the freedom is not controlled, then it would be the freedom that is only beneficial to the most dominant players in the economy. Therefore, it can be said that control and regulation is aimed at making sure that everyone is able to practice the economic rights that are given to them by the constitutions. Government intervention is not only aimed at promoting competition, but also protecting consumers from being exploited by the business organization. Exploitation in this context comes in the form of overpricing or production of products and services or low quality. When this happens then the country’s economy might be affected in many ways. One of the ways through which a country’s economy might be affected is the local consumer’s preference of foreign goods. When the qualities are low the local business organizations might find it challenging when it comes to competing with business organization in the international market. Therefore, it can be asserted that the regulation of qualities is both for the purpose of protecting the country’s economy from underperformance and protecting the local consumers from substandard products and services. One of the ways through which a government can control the influence of natural monopolies is through government production. Government production makes monopolies less aggressive in the market as they offer competition in terms of price and quality. The advantage of government production is that consumers can always get goods and product at more affordable prices. However, government production can lead to a general compromise in the quality of goods and services available in the market. Regulation is the process through which the government can make sure that they control production aspects such as price and quantity. The advantage of government regulation in a monopolistic market is the fact that it ensures that products are availed in sufficient quantities and at fair prices. However, government regulation has over the years spread to many areas, making it more complicated to even the people who want to offer competition to monopolies. The government can also intervene in a monopolistic market by making sure that players in such markets do not hike their prices unnecessarily. Given that there is no direct competition in monopolistic market, monopolies can get the temptation of maximizing their profits by increasing their prices. The only way through which governments can regulate and control prices in monopolistic markets is by making sure that they research on the rate of return on capital invested and pricing behaviour. This will be specifically in the bid to protect the most important interests of the general public when monopolies are given the freedom to set process there would be no person entrusted with the responsibility of saving the consumers from being overcharged apart from the government. One of the things that always make sure that every consumer is given value for their money in a perfect competition is that availability of alternatives. When a business organization knows that their targeted market has alternative products and services they will always work hard to ensure that the level quality of the services and products that they avail are as high as possible. This is something that cannot be said about the monopolistic market. Monopolies do not have to worry about there being alternatives for their goods or products in the market (Wang 2008, p.138). Therefore, there is need for governments to set standards for products and services produced by monopolies within their territories. Without such regulation then monopolies might not even bother improving their products and services, or even adopting new technologies. Lack of improvement by monopolies can lead to stagnant economies. Every government should also make sure that monopolies do not abuse their monopolistic powers. When monopolistic powers are abused, there are always two things that are staked. The two things that are usually at stake are public interest and market failure. When monopolies are involved, there is always very little that the general public can do so that their interests are taken into consideration. Therefore, the government’s intervention is much needed to make sure that monopolies carry out their activities in a way that will not bring discomfort to the members of the general public. When takeovers take place at a high rate then it means that there is a business organization that is slowly gaining market shares. This implies that the industry that the company is involved in is slowly moving closer to being a monopolistic one. If a single business organization manages to get more than 40% of the total market share then it can be said that the business organization in question has accumulated undue market share. In this light it can be assumed that takeovers are one of the ways through which business organizations eliminate competitions. This is specifically true if the business organization being acquired is a direct competitor to the business organization making the acquisition. Therefore, governments have to make sure that there are policies in place that are aimed at making sure that companies are only allowed to acquire up to a certain percentage of an industry’s total market share (Owen, Sun & Zheng 2008, p. 252). Some governments also limit the effects of takeovers by making sure that business organizations of a certain size, either have a hard time when acquiring their direct competitors or making such acquisitions completely impossible. Just like takeovers, mergers can also lead to monopolistic tendencies. When two or more players in an industry who are previously perceived to be the most dominant players in an industry come together as one then it is bad news. This is because they will have control of a majority of the market share in the industry. This kind of dominance is not good for both the market and the consumers. The resultant business organization can always raise their prices whenever they felt like doing so. Even if there would be competition, the competition would not be enough to counter the dominance that results from the merging of key players in an industry. Therefore, the government should make sure that business organizations that want merge give a good reason as to why they want to merge. Furthermore, most governments also make it almost impossible for direct competitors to merge. The process that usually involves merging of two dominant companies is so complex that in most cases the attempts are unsuccessful. Before governments allow mergers to take place they usually make sure that they undertake a thorough investigation with regard to all the underlying information and motives behind the merger. If the government is not convinced of the importance of the merger to the general population and the country at large then they have the power and the responsibility of making sure that the merger does not go through. Collusions are always illegal in most countries. As much as it can be seen as a positive thing when competitors come together and find a way through which they can work together, collusions in most cases are aimed at benefiting the involved parties at the expense of the general public. Collusions are mostly common in oligopolistic markets. When oligopolies come together and agree on certain prices, then when the people are most disadvantaged are their customers. It is the responsibility of governments to make sure those citizens are not exploited that, cartels that result from collusions. Therefore, they should make sure that quality of services and products and prices in such industry are regulated and are expected to reach certain standards and limits (Yue, Jing & Xu 2008, p. 201). Through such policies governments can make sure that even if business organizations form cartels they would not be able to exploit the general public by setting high prices and not focusing on the quality of production. As a result of such policy business organizations will see no need of forming coalitions with the aim of exploiting consumers because they will know that there are policies that are put in place by the government to protect the general public from exploitation. One of the ways through which government controls the influence of monopolies is through average cost pricing. Average cost pricing is the process through which a government enforces a price point for services and products depending on the costs that were incurred during their production. Average cost pricing is a way through which a government can make sure that they reduce the price elasticity in a monopolistic market. This does not only apply to monopolistic market, but also to industries whereby certain companies and corporations have gained dominance as a result of acquisitions and mergers (Harris2006, p. 169). This is always aimed at making sure that the involved business organization do not overprice as a result of their dominance. Through such a policy the maximum profit per investment is always limited. Governments also control the operations in monopolistic markets by putting in place policies that are known as piece ceiling. Price ceiling are policies that, make sure that monopolies are not allowed to charge more than a certain process for their products and services. The process are always set in such a way that the monopolies are able to earn profit but not at the expense of the general public. Given that there is nothing like price competition in monopolistic markets such policies are very helpful in ensuring that members of the general public do not exploit members of them. Such policies do not only control the pricing of monopolies, but also for the big corporations that have attained dominance through merging and acquisition (Lin & Zhao 2012, p. 178). Suppose a government does not allow a monopolist to charges that are past P0. Whether the company sells more or less than demanded then the price will still be P0. Therefore the company will have marginal revenue with discontinuity as shown in figure1. With the restriction the company’s optimal output is y0, while the marginal revenue has a discontinuity. Therefore, the result of the regulation is that prices go as low as P0 while the output increases to y0. Figure 1: Other governments have also been observed to use the rate of returns regulation as a tool for making sure that there is fair competition in their economies. Rate of returns regulation is in many ways similar to average cost pricing. However, the main difference between rate of returns regulation and average cost pricing is that rate of return regulation has a model that allows the business organizations that are involved to have consistent returns. In this case the percentage profit that a company earns must be below a certain percentage that is always determined by the government. In most cases the limit is always at 5%. This is an approach that is aimed at making sure that the prices charged by monopolies are as low as possible (Park 2012, p. 98). However, this policy can be said to be only effective to price regulation and not in quality or quantity regulation. Subsidies and taxes are also other ways through which governments can be able to control and regulate monopolistic operations. When there are more dominant players in a certain industry the government can decide to overprice them so that there is a level competitive ground for both the dominant and the less dominant players. When more dominant players are overtaxed they will not be able to use their production volumes as an advantage for facing out competition. With a bigger production volume business organization is always able to less per unit production cost. With less production cost the dominant players are always unbeatable in the market. This move is specifically not aimed at making the process better for the general public, but to make sure that the markets remain competitive and that all the players are accorded equal chances. Governments can also decide that they will offer subsidies to the less dominant players in the market. By doing so, a government is always aiming at making sure that they bring the less dominant player to the same competitive level to the dominant players. When certain companies start dominating the market, they always do all they can so that they can eliminate competition. In the business environment you will thus find that the smaller companies are struggling to survive while the more dominant ones are doing all they can so that they can be more dominant (Joon 2009, p. 123). However, with the subsidies they are always left on the same level with both big and small companies fighting for both survival and growth. This might not have direct impact to the lives of the general public but has a positive effect on the national economy which will eventually reflect in the lived of the country’s citizens. A number of countries also have policies that assert on the investigation of mergers that might lead to the formation of monopolies. Monopolies have been discovered to have a negative effect to the lives of the general public and the country’s economy. For example, in the United States of America, if a merger leads to the formation or an organization with more than 25% of the market share the case is always referred to the Competition Commission. The Competition Commission is a government agency in the United States of America that is entrusted with the responsibility of making sure that fair competition is enhanced in the various markets (Siem & Waldfogel 2013, p. 111). When such a case is forwarded to the Competition Commission they are always expected to do their investigation and decide on whether or not the merger should be blocked. In some cases some governments have also opted for breaking up monopolies the only way through which they can prevent the negative effects of the existence of monopolies. However, it should be noted that this is a very rare scenario. In most cases, governments usually initiate such processes, but eventually drop them. A good example of such a scenario is when the government of the United States of America unsuccessfully attempted to break up Microsoft. This is always viewed to be a very extreme action as there is always no assurance that the business organizations that results from the breakup would not collude illegally. Many governments also have agencies that are entrusted with the responsibility of constantly observing the operations of monopolies and make sure that none of their power are abused. For instance, in the United Kingdom, the office of fair trading is entrusted with the responsibility that there is no abuse of monopolistic powers with the UK territories. The activities that the office of fair trading is expected to look out to include collusion and collusion tendering; predatory pricing, which involves using highly low process to face out competition; and selective distribution. Just like in the United Kingdom many other countries have their own agencies that have the responsibility of protecting both the consumers and less dominant players from the most dominant and powerful companies. As discussed herein it is clearly evident that the government’s involvement in the control and regulation of collusion, mergers, takeovers, and natural monopolies is of high importance. This is because this involvement reduces the negative effects that might result from these activities. It is good to note that government involvement in the control and regulation of collusion, mergers, takeovers, and natural monopolies helps in making sure that the country’s economy is stabilized through encouraging fair competition and stabilized market structure. Government regulation is also important in making sure that members of the public are not exploited by monopolies or dominant business organizations that rest from mergers and acquisition. Therefore, it can be concluded that government regulation of collusion, mergers, takeovers, and natural monopolies is important in making sure that everyone benefits from the country’s economic activities while at the same time making sure that the economy of the country is sustainable. Bibliography Harris, HS 2006, “Making of an Antitrust Law: The Pending Anti-Monopoly Law of the Peoples Republic of China” Chi. J. Intl L., 7, 169. Joon, K 2009, “Merger Control under Chinese Anti-Monopoly Law” Journal of Korean Competition Law  Volume: 20. Lin, P & Zhao J 2012 “Merger Control Policy Under Chinas Anti-Monopoly Law” Review Of Industrial Organization Owen, BM, Sun, S & Zheng, W 2008, “Chinas Competition Policy Reforms: The Anti-Monopoly Law and Beyond” Antitrust Law Journal, 231-265. Park, SJ 2012, “Supervisory control for dynamic monopoly” Iet Control Theory And Applications  Volume: 6   Issue: 7 Siem, K & Waldfogel, C 2013 “Public Monopoly and Economic Efficiency: Evidence from the Pennsylvania Liquor Control Boards Entry Decisions” American Economic Review  Volume: 103   Issue: 2. Wang, X 2008, “Highlights of Chinas new anti-monopoly law” Antitrust Law Journal, 133-150. Yue, X, Jing, Y & Xu, B 2008, “Research on Incentive Strategy for Optimal Provisioning and Dynamic Pricing Control of Monopoly Networks” Conference: 20th Chinese Control and Decision Conference Location: Yantai, PEOPLES R CHINA. Read More