Corporate mergers and income inequality

You can’t look at the Wall Street Journal or any other business publication nowadays without reading headlines about yet another megadeal. Many industries are consolidating, and that translates to fewer jobs.

This year alone has brought major mergers resulting in a number of industries being dominated by a few firms. Look no further than big-box retailers, too-big-to-fail financial institutions, airlines, health insurers, communications, utilities markets and a broad range of industrial sectors including defense and the beer industry with the $104.2 billion deal between Anheuser-Busch InBev NV and SABMiller.

Last month, after approving Lockheed Martin’s $9 billion acquisition of Sikorsky Aircraft, Pentagon officials warned against further consolidation in the U.S. weapons industry because fewer defense contractors could inhibit innovation, lead to higher costs and result in less competition. Four airlines (American, Delta, United and Southwest) control over 80 percent of the domestic market. There were nine major carriers in 2005.

The wireless industry is also dominated by just four firms. Even there, AT&T and Verizon are much larger than T-Mobile and Sprint, controlling about 70 percent of all subscribers.

In retail, Walgreens, the largest U.S. drugstore, just announced it would acquire Rite Aid, the third­ largest drugstore chain, for $17.2 billion in an all-cash transaction for $9 a share, a 48 percent premium to Rite Aid’s closing price of$6.08. The proposed deal would essentially consolidate the industry into two large retail chains: Walgreens and CVS Health. It follows on the heels of CVS acquiring Target’s nearly 1,700 pharmacies over the summer and the potential merger of Staples and Office Depot.

Business people may be the leading champions of free markets and competition, but Marx, writing in Das Kapital, was spot on when he wrote, “One capitalist always kills many,” meaning that markets that are originally open and diverse evolve into oligopolies with a few firms using their power to keep competitors out and cornering the spoils of a particular industry for themselves.

In theory, consolidation can create economies of scale that reduce costs and consumer prices and save jobs at firms too weak to make it on their own. When it comes to mergers, “synergy” – cost efficiencies including combining complementary assets, eliminating duplicate activities, consolidating stores, integrating computer systems, and increasing profit margins by using increased volume to squeeze concessions out of suppliers – is an often-used word.

It’s all about eliminating redundancies, and that means jobs. Of course, it may be easier to pan for gold than to actually achieve these vaunted cost reductions because the savings are often overestimated and don’t always account for take-over premiums.

On the other hand; it is reasonable to assume that consolidation has played some role in the income stagnation suffered by American workers. This contributes to income inequality, the loss of many middle-level jobs and a record number of American workers no longer participating in the labor force as firms pursue cost efficiencies.

Big corporations hope consolidation makes it harder for new competitors to enter an industry and leads to increased market power. By controlling the market you control the customer and can raise prices unilaterally. And while coordinating pricing strategies is illegal, a smaller number of players in an industry makes tacit collusion easier.

Under current antitrust laws, two agencies -the Antitrust Division of the Justice Department and the Federal Trade Commission- can review proposed mergers and decide whether they are anticompetitive. American consumers and labor should hope these regulators have a grasp of the downsides of consolidation that is better than Roger Goodell’s understanding of due process.

Based on the regulators’ performance in the run-up to the financial crisis, the truth is that if these folks were convicted of being competent, we would be convicting innocent people. Let’s hope we are not going to sit shiva over the notion of competition that rewards hard work and promotes innovation and meritocracy.

Originally Published: November 11, 2015