On allowing mergers of big companies-they should never be approved!

Recently Dow and Dupont signed an agreement to merge.
Big companies 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 and increase their profit margins; and they use bogus arguments to get the Governments and anti-monopoly organizations to pass  their mergers.

Taking out a competitor lowers competition, and therefore increases prices for the consumers.

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 Telecom 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.

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

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

Sanjay