8.10. Federal Regulation: The Antitrust Laws

The American free enterprise system is based on the belief that competition is in everyone's best interest. When competitors agree to fix prices, rig bids, or divide the market, the public loses the benefits of competition. The prices that result are artificially high. This is unfair to consumers who must pay more for the things they buy. It also damages an economy that looks to the price system to signal what goods and services are in demand and the most cost-effective way of producing them.

For that reason, the federal government has enacted legislation known as antitrust laws-laws designed to safeguard competition. The major federal anti­trust laws are The Sherman Antitrust Act, the Clayton Act, the Federal Trade Commission Act, and the Celler-Kefauver Antimerger Act. Nevertheless, many businesses are naturally interested in growing and controlling as much of a market—or several markets—as possible. One way to accomplish this goal is through mergers.

8.11. The Urge To Merge

How do some businesses grow to be worth billions of dollars and large enough to control a market? Busi­ness firms expand in one of two ways - internally or externally. Firms that grow internally expand their activities by adding plant, equipment, and person­nel. Those that grow externally acquire other com­panies through "mergers."

A merger results when one corporation acquires the stock of another. Following the merger, the acquired firm is either dissolved or becomes a division of the combined, new firm. The number of mergers in recent years has reached enormous proportions. In 1990, for example, over 4,000 corporations were involved in a merger.

Mergers take place for several reasons. Some com­panies buy others in order to add new products and "spread the risk"; others want the benefits of in­creased size. Still others wish to reduce costs by acquiring assets like marketing or transportation facilities. Some view mergers as a way to reduce or eliminate competition. In recent years, a number of mergers were arranged because the buyer hoped to profit from the resale of part or all of the acquired firm.

Mergers fall into three categories: horizontal, verti­cal, or conglomerate.

Horizontal Mergers. The combination of two or more companies engaged in the same business-like two book publishers or two car manufacturers-is a horizontal merger.

Vertical Mergers. The combination of two or more companies involved in different steps of the same production process is called a vertical merger or ve­tical integration. An example of a vertical merger would be an automobile manufacturer that bought a steel mill to make the steel it needed for its cars.

Conglomerate Mergers. A conglomerate merger combines two or more unrelated businesses under single management. Examples of conglomerate mergers include Liggett & Meyers, a cigarette manufacturer, merging with Alpo, the dog food company. General Mills, which markets breakfast cereals and other food products, also owns Izod Lacoste clothing, Lark Luggage, and Parker Brothers.

Some businesses have become more efficient and more profitable as a result of recent mergers, but some consumers wonder if these mergers are reduc­ing the level of competition in the marketplace. Some companies also establish joint ventures with other companies. In a joint venture two companies keep their independence while cooperating on a par­ticular project. Toyota and General Motors teamed up to produce the Nova (now called Geo). Joint ven­tures allow companies to combine resources without many of the problems of mergers.