4. On allowing mergers of big companies who are competitors-they should never be approved!

Big companies who are competitors merge all the time in all countries. In almost all cases, this is bad for the country. Here's how to see this.

The most common argument used by companies to get approval from the Government (FTC, FDA, etc.) is that a larger company will be better scale, and economies of scale will lead to lower costs, which they will pass along to the customer in the form of lower prices.

They are telling half of the story right. The economies of scale will work to reduce costs, but they are not going to pass along the cost savings to the customer or the consumers! They will just keep the extra profit themselves.

The price of something is decided by the market demand. If a company is able to lower costs, it will keep the extra profit to itself. It will lower prices only when 1) there is competition, and/or 2) they believe that lower prices will lead to much larger volume, leading to  the net dollar value of the revenue (price x volume) being much larger than before. Since no one can be sure that the volume will increase on lowering prices, and it will need extra investment and hassle on the company's part to increase volumes, the safest bet is to keep prices unchanged; and that means they will just keep the extra cost savings to themselves. Only a foolish businessman passes along their extra cost savings to the customers; the intelligent one just keeps it himself!

What happens when companies merge is that it reduces competition, and therefore in reality increase prices for the consumers. The larger the companies, the less the competition; and the more chances they have to collude and raise prices (easier to collude when there are 2 to 3 actors than when there are 10 to 20). Mergers always will result in higher prices for the consumers. They should never be approved.

The only exception where they can be approved are when the product is international-e.g. crude oil, copper, etc. Since there are many big competitors in other countries, it makes sense for commodities which are easily shippable worldwide to have large players at home as well. But this should be done only if we can buy foreign goods easily (to take advantage of lower prices outside our country, if some company outside offers lower prices). In almost all cases, this is not true; therefore, mergers in general are bad for the country's consumers.

But here I just wanted to point out the fallacy of the argument of economies of scale: lower costs-lower prices...it is simply economies of scale and lower costs, but not lower prices for the consumers. Those are two different things-lower costs are a benefit of economics of scale. But what lowers prices in the marketplace is competition. The producers always want to lower their costs, reduce competition in the market and therefore raise prices, and increase their profit margins from both ends (cost go down because of economies of scale, prices in the market go up because of less competition); and they use bogus arguments to get the Governments and anti-monopoly organizations to approve  their mergers.

Lowering of costs does not necessarily mean that the prices will be lowered. Companies lie when they use like "we will pass on the cost savings to customers". They will keep a higher profit margin, but will never reduce prices! Prices are decided by the market, and do not depend at all on the costs.

If you produce something at cost X and I want to pay only Y for it (at a given volume V of units sold), and if Y is less than X, you will go bankrupt as a company, and that is not my problem. I as a consumer care only about my dollars, and will only pay Y for your product. It is your job to make sure that X is less than Y, your profit is (Y-X)*V. But note that Y has no relationship to X, Y is decided by the consumers, the marketplace, the market; X is decided by the producer, the capitalist who brings the product into the market. Y is reduced by more competition, that's the surest way to lower prices for consumers, which should be the goal of the economics and anti-competitive agencies, or governments in general. Lowering X does not necessarily mean that Y will be lowered. When companies merge, they may be able to lower costs (overlapping departments of marketing are cut down, etc.) but even if they are not successful in lowering costs, they will definitely benefit by increasing Y, because they will not be forced to bid against each other in the marketplace.

The big lie is that we are merging because we want to lower costs. NOT! Companies buy other companies to take out the competitors, so that Y, the price which consumers pay, is more...and even if there are no cost savings, a merged company benefits, because it reduces the pricing pressure in the market. In summary: taking out a competitor lowers competition, and therefore increases prices for the consumers. Two companies who merge keeping exactly the same cost structure as before, without any cost savings (from synergy, or whatever managementspeak they use), will still be able to command higher prices, because the market place has less competition. That's their real motivation for merging.

I can't stress enough that the costs of producing a product have nothing to do with the prices you get in the market for that product-prices are decided by the consumers, costs are decided by the skill of the company. Consumers (or the customers, if the company sells to other businesses, B-B sales) are the deciders of prices, and couldn't  care less about your costs (if you are a company). Managing costs is your problem, not theirs. The consumers will buy less if goods are priced higher-and if you want to keep the volume at a fixed level (e.g. 1000 units a day) the ultimate pricing of those products will be decided by the consumers for that volume. If you increase the price, you will necessarily reduce the volume. I give this simplistic example to explain the concept involved; but I hope you can see clearly that costs are an internal part of the company, whereas final prices are an external dynamic, determined by the marketplace, and companies have no bearing on them directly, except that all companies make competing offers in the marketplace. Indeed, getting rich in life means that you can sell products at a very high price at a good volume, and that those products cost really low to produce. The statement "costs determine prices" is false, if a company tells you that they are raising prices because their costs are rising, it is a lie; they are raising prices because they can. After all, if they knew that they could raise prices without sacrificing volume, they would have done so already, increasing their profit margins.

Next time a trade body like the FDA or FTC of your country approves a merger, tell them this! Almost all countries in the Americas, both North and South, have a problem in the banking, telecom, transportation and pharma sector. The telecom monopolies are really horrible for the country's consumer. This is why Carlos Slim is so rich-he has little competition, and Mexico has given him a license to screw over all Mexicans by having little or no competition. Any time you have fewer than five or six actors in a place for a sector, they essentially combine to raise prices. This was explained well by Smith; and instead of simply never allowing this to happen at the first place, or at least not encouraging it by allowing mergers, governments regularly approve mergers even when very few actors are present, to the vast detriment of the consumers/customers.

Competition and presence of many actors lowers prices for consumers. Mergers do exactly the opposite.

If companies were as nice as they would like you to believe when they say stuff like "we will pass on the cost savings to consumers/customers" and knowing that, in general, the economies of scale do lead to lower costs for two companies which merge, it necessarily means that the extreme case of just having one company do everything is the most efficient for everyone: the costs are the lowest because of massive economies of scale, the company is going to pass on all these low costs to the consumers in the form of lower prices, and everyone will be happy getting the products at the cheapest possible price. This extreme case of just one company doing everything is the same as everything owned by the government, which we all know is contrary to lower prices (or abundance of products, which is the same thing). The extreme case of mergers is therefore clearly a disaster for the consumer. Therefore, if there are five companies producing a product, and you allow two to merge based on the logic that increasing cost savings of the merger of these two companies (and them passing along these cost savings to the  consumers) will lead to lower prices in the marketplace, why not merge all five of them and have the costs even lower? If a merger of all companies into one company is bad for the market, as should be obvious, any time you push the market closer to that by allowing two to merge, you are in effect increasing prices for the consumers by lowering competition.

In situations where there are only a few big companies left, it is not a bad idea to have a state-owned (central government or regional government owned) company exist side by side. In small countries like Chile and Canada, there are four or five large companies in important sectors like transportation, banking, telecoms, etc. The presence of a state actor is a good solution. This is also true in critical services like health-care, where a large state actor always lowers prices for the consumers-by providing the confidence that they will be taken care of when they really need help. Companies always find ways to collude and raise prices of goods and services, and the government can't possibly keep up with the newer and newer ways they find of doing this (they do give them fines when they find out they have colluded; but it is always too late). It is best to have a state owned enterprise in such cases. The privates can exist side by side with the state owned enterprise; I don't see a problem with that. But the presence of a state owned actor helps the consumers a lot. In Chile, the state owned Banco del Estado is by far the biggest of all banks (there are about 5 independent banking companies). The state backed health insurer, Fonasa, has about 80% of the market share; all other privates, about 5 in number, share the rest of the 20%. Consumers do prefer a state actor even when free choice is provided in critical services like banking, healthcare, etc. This point is lost on free market lovers; the presence of a state owned actor in addition to private actors is a good thing for consumers, and can only help in lowering prices.

This is also closely related to whose side the government must take-the consumer's or the producer's? It must always be the consumer. Here's the article which explains this.