Gigantic mergers are bursting out all over, and we seem headed for a new era of vigorous antitrust enforcement–if we aren’t careful.
Citicorp and Travelers, for example, have announced plans for a merger to form a company that will engage not only in banking but also in insurance and brokerage. It will have $700 billion in assets. BankAmerica will merge with NationsBank to form the biggest financial services company in the world, while Banc One and First Chicago are combining in a stock swap. The likely outcome, according to analysts cited in the Wall Street Journal, is a market with a handful of financial powerhouses and a great many small community banks. Major consolidations are occurring elsewhere in the economy. The question is how the government will react.
The American streak of populism is by no means defunct, and the sheer size of these mergers will certainly arouse queasiness and cries of alarm. We can only hope the antitrust division of the Department of Justice maintains its composure and watches parts of the economy restructuring with a benign eye. We have been through merger waves (or frenzies, if you prefer) in the past without any of the dire forecasts that accompanied each one coming true. The American economy is remarkably resilient and adaptive, and these days it reacts with positively breathtaking speed to profit-making opportunities. If, in some geographic or product segment somewhere, there is a lack of competition, that circumstance will not last long. Competition will probably appear in less time than it takes the government to prepare and litigate a case.
To lapse for a moment into the professorial, mergers, as every antitrust lawyer knows, are conventionally analyzed in three categories: conglomerate, vertical, and horizontal. Conglomerate mergers–those between firms that are not competitors and do not stand in a relationship of supplier and customer–though once thought to pose a competitive threat, are no longer seen as fit subjects for antitrust attack. Vertical mergers, those between supplier and customer, remain somewhat controversial, but it is impossible to see that they confer the ability to restrict output. Their hoped-for effect is the creation of efficiencies, and they should be dropped from antitrust’s lexicon.
Horizontal mergers are the proper subjects of antitrust inquiry. When they create very large market shares, something approaching monopoly, they do create the ability to restrict output in order to maximize revenues at the expense of consumers. There is, of course, oligopoly theory, which predicts that a market dominated by a few large firms may display the characteristics of monopoly. Experience shows, however, that there is little to fear from oligopoly. Before the Japanese car makers hit the U.S. market, the automobile industry was routinely cited as a classic oligopoly. This view ignored the facts. The American market, with three companies, displayed constantly shifting market shares (even greater shifts were apparent among models), product and design rivalry, and price fluctuations. There was no lack of competition. We may, then, concentrate on single-firm size.
The financial services industry will have five or six large firms–too many to fear restriction of output. To reinforce that conclusion, there will be many small community banks that will eagerly serve any segments of the market the giants ignore or overlook. There seems no reason to be concerned about the horizontal sizes created by the current merger wave.
The proper remedy for the government’s antitrust enforcers is a large dose of Valium.
I look forward to hearing your views.