Acquisition of Major Competitors and Pricing - Essay Example

Acquisition of major competitors and pricing Many people would be against acquisition of competitors because it is one of the ways through which monopolies can be created. This is because when a major player in an industry acquires their competitors, they end up accumulating the market share that was previously under the control of their competitors. As a result of such marketing strategies big corporations have the luxury of controlling market prices without having to fear being out priced by their competitors. In such scenarios it can always be said that the consumers are the people who are most affected. Thing might even get worse in a scenario where an organization acquires a competitor then increases prices of products or services that they deal in while at the same time do very little to enhance quality or even offer products or services that are of a lower quality than they used to before. In some cases it will be seen that an organization has just acquired their main competitors but not all the competitors. The point in acquiring their main competitors is that, even the minor competitors will not be able to go into a price war with them (Engelbeck 2002, p. 137). For instance, the proposed acquisition of Times Warner by Comcast will mean that Comcast will have more than 30% of the total broadband market share in the United States of America. This does not imply that they will gain total control of the broadband market in the United States of America. It will mean that they will gain majority shares of the market and the remaining shares will be divided among other organizations that do not have the resources that can put competitive pressure on them (Haws & Bearden 2006, p. 307). Even if they decide to increase their prices the other existing companies will not be in a position to take advantage of this and compete for the market share. In such a scenario, it is highly possible that they will even offer lower quality services and still charge higher than they used to do before. In a perfect competitive market pricing is usually seen as a very important factor. In a case where two products or services have the same core characteristics but product by different organizations, there is always a resulting competition (Paley 2006, p. 227). In such scenarios, competing organizations always do all they can so that they can win more customers. One of the ways through which competing companies usually win more customers is through their marketing strategies. In such a scenario, it will be seen that organizations usually tend to set prices according to the prices of their competitors (ÖZer & Phillips 2012, p. 177). This is because in most markets, majority of consumers will always prefer the more affordable products or services. This is specifically true in a case where the products or services in question do not have much difference in terms of quality. In a typically competitive market, a business organization will consider researching on the prices of their competitors before they settle for a pricing strategy. Acquisition of competitors might also bring a change in the pricing environment. There are three types of pricing environments. These environments include: the market controlled, the government controlled, and the company controlled. In a market controlled pricing environment there is little control of prices with there being high price flexibility due to high levels of competition (Smith 2012, p. 201). This is the kind of pricing environment that is common in perfect competitions. Every player wants to do all they can so that they can win customers. In the company controlled pricing environment, there is always moderate or no competition with prices being controlled by individual firms (Smith 2012, p. 214). This type of environment is common for industries which deal in unique products and services. Government controlled pricing usually affect public run organizations. In some scenarios monopolies can also be put under this category because of the kind of restrictions that governments usually put on their pricing strategies.However, it is clear that when a company acquires its most fierce competitors they make it easier for a market controlled pricing environment to a company controlled pricing environment. This is because they will be eliminating the organizations that are most likely to go into price wars with them. Every product or services usually have their price range. In a perfect competition, a business organization has to look at the prices of their competitors so that they can know exactly where they can fit in the pricing range (Bruner 2004, p. 257). However, this will not be the case of an organization acquires their competitors. They will have no competitors to refer to. This will also mean that they will have no price range. Even if the price range will be there, it would not be as restricted as a range that involves a number of competitors. In such cases, business organizations end up having allot of freedom when it comes to setting prices for their products or services. If they acquire the most significant competitors there will be absence in the restriction on the pricing limit, especially the upper limit (Schindler 2012, p. 197). This means that such organizations can always increase their prices without having to fear that they will lose customers to their competitors. Features of a product or service are always of high importance when it comes to pricing. In most cases products or services with the most features will always be the most expensive. In a normal case, business organizations will always make sure that their products or services have the most relevant features so that they have an added advantage when involved in competitive pricing. With extra relevant features, consumers will never mind spending extra money. After all the extra features only mean that the product or service being sold will be more satisfactory. This is the case in a perfect competition (Haleblian, Kim &Rajagopalan 2006, p. 366). However, this cannot happen in a case where a company strategically eliminates competition through accusation. Acquisition leaves consumers with very few options to choose from. In some cases, they are even left with no option at all. In such a case a company will not be under the pressure to enhance the features of their products or services in order to increase their prices (HüSchelrath 2009, p. 189). All they have to do in this case is to make sure that there is none of the players in the market that can offer a realistic substitute to their product or service. In the long run customers are forced to pay more for the products or services produced by such companies because there are no viable options in the market. In a situation where a company acquires their competitors, they gain the power of increasing the power that they have in terms of price determination in a market. If they are able to eliminate the most significant competitors, a company can have the freedom of producing products till they get to the point where their marginal revenue is the same as their marginal cost. In such a case the maximization of profit will be possible depending on where the profit-maximizing quantity amount is on the average revenue curve (Glynn & Woodside 2009, p. 202). This implies that the profit earned by a business organization can be deduced by multiplying the quantity of products sold by the difference between the prices that is charged minus the average cost of producing the product. With acquisition, a company can charge prices that are by far more than the average cost of production because they are able to do so without feeling the pressure of there being another company that will offer better prices. In such cases, consumers are always the ones who are most affected because of lack of other options in the market. As much as it can be said that when a company acquires their most significant competitors, they get the freedom of setting prices, if they over price there is a likeliness that there will be a decline in demand in the long run. At this point such companies usually find it necessary to differentiate their products, which imply that there will be an increase in the average production cost. This implies that in the long run such companies have to either produce surplus or settle for less income. This can also imply that such an organization will only be able to break-even, but will not be able to make economic profits. This is the reason as to why it is always advisable for companies to keep their pricing moderate even if they create a monopolistic market through acquiring their competitors (Duffhues & Renneboog 2006, p. 211). When the increase in prices is very high, then consumers are most likely to look for substitutes or find a way in which they can do without the product or services produced by such organizations. One thing that should not be forgotten is the fact that the freedom of setting prices even after eliminating competitors highly depends on the nature of the product or service produced by a company. Whether the increase in price will affect demand for the product depend on the level of necessity of the product or service being produced by a business organization. If it is a product or service that people can do without, some of the customers will either reduce the quantity of consumption or even stop the consumption. However, products that are of high necessity in the lives of human beings are likely to be demanded even if the prices are increased. Some products also happen to have close substitutes (Engelbeck 2002, p. 199). Substitutes are not exact products, with the same feature, but are products that have the capacity of fulfilling the needs that a certain product is expected. Even if a company acquires their most significant competitors, thus the pricing freedom, a business organization cannot dictate the pricing of substitute product. This makes overpricing very difficult in such cases.The most probable advantage in such an acquisition is that there would not be direct competition. Most governments are always highly involved in regulation of economic activities within their boundaries. One of the ways through which this involvement is always manifested is the kind of protection that they give to consumers from extortion. This is because in some markets some companies can have the freedom of setting prices that suit their wants due to lack of competition. Such an environment can be created through acquisition (Drexl 2011, p. 212).Government can make sure that such organizations do not extort consumers through introducing price control policies. Price control policies make sure that business organizations are not allowed to earn more than a certain percentage of their production cost as profit (Schlossberg 2008, p. 153). Another policy that can be of help in such a case is controlling the quantity of products that is produced in such a market. With the kind of dominance that is brought about by the acquisition of competitors, companies can lower the quantity that they produce so that they can induce an increase in demand. In such an environment, a company will find it easier to increase their prices. It is clearly evident that acquisition of competitors can have a huge influence of price flexibility. Much of this flexibility comes from the fact that acquisition eliminates competition, leaving a company with the freedom of setting prices. Pricing is a very important thing in the business environment. As seen herein, it is actually from pricing strategies that business organizations are able to make profit. It has been seen that reviewing prices of competitors are of high importance in a perfect competition. However, when competition is eliminated, there is actually no need for such reviews. It has also been seen that the amount of influence that a company can have on the market as a result of acquisition depend on the nature of the product or service that they produce. The government uses regulatory policies to make sure that acquisition of competitors does not lead to extortion of consumers through overpricing. Bibliography Bruner, RF 2004, Applied mergers and acquisitions, John Wiley & Sons, Hoboken, N.J. Drexl, J 2011, Competition policy and the economic approach: Foundations and limitations,Elgar, Cheltenham. Duffhues, P &Renneboog, L 2006, Advances in corporate finance and asset pricing: [this book is in the honour of Professor Dr. Piet Duffhues], Elsevier, Amsterdam [u.a.]. Engelbeck, RM 2002, Acquisition management, Management Concepts, Vienna (VA). Engelbeck, RM 2002, Acquisition management, Management Concepts, Vienna (VA). Glynn, MS & Woodside, AG 2009, Business-to-business brand management: theory, research and executive case study exercises, JAI Press, Bingley. Haleblian, JJ, Kim, JYJ &Rajagopalan, N 2006, “The influence of acquisition experience and performance on acquisition behaviour: Evidence from the US commercial banking industry” Academy of Management Journal, 49 (2), 357-370. Haws, KL & Bearden, WO 2006, “Dynamic pricing and consumer fairness perceptions” Journal of Consumer Research, 33(3), 304-311. HüSchelrath, K 2009,Competition policy analysis an integrated approach, Physica-Verlag, Heidelberg. ÖZer, O & Phillips, RL 2012, The Oxford handbook of pricing management,Oxford University Press, Oxford. Paley, N 2006, The manager's guide to competitive marketing strategies, Thorogood, London. Schindler, R 2012, Pricing strategies: a marketing approach, Sage Publications, Inc, Thousand Oaks, Calif. Schlossberg, RS 2008, Mergers and acquisitions: understanding the antitrust issues. Chicago, Ill, ABA, Section of Antitrust Law. Smith, TJ 2012, Pricing strategy: setting price levels, managing price discounts, & establishing price structures,South-Western Cengage Learning, Mason, Oh. Smith, TJ 2012, Pricing strategy: setting price levels, managing price discounts, & establishing price structures, South-Western Cengage Learning, Mason, Oh. Read More