This post is part of a symposium on Root and Branch Reconstruction in Antitrust. Read the rest of the symposium here.
The economic pathologies brought to the surface by the Coronavirus pandemic, such as price instability, fragile supply chains, and end-good shortages, are in part a story of corporate consolidation and lax merger policy. Contributing to or taking advantage of ongoing inflation, chief executive officers and chief financial officers—in industries ranging from agricultural chemicals and seeds to mattresses to rental cars—have boasted that they have been able to raise prices and boost profit margins.
The extraordinary pricing power of corporations in many sectors is a result of policy choices. Most notably, the Reagan administration effectively reinterpreted and neutered Section 7 of the Clayton Act, a strong antitrust law that Congress had enacted against corporate mergers. As the Supreme Court recognized in 1966, “Congress decided to clamp down with vigor on mergers” and “arrest a trend toward concentration in its incipiency before that trend developed to the point that a market was left in the grip of a few big companies.” Reagan’s Department of Justice (DOJ) and Federal Trade Commission (FTC), however, disregarded Congress’s judgment and pursued a pro-merger agenda, granting extraordinary power to executives and investment bankers to roll up markets through consolidation.
As two scholars wrote in 1988, the Reagan administration’s policy statements on merger law and dearth of anti-merger enforcement served “as an invitation to [corporate America] to merge with anyone.” Every subsequent administration, Democratic and Republican, has followed the Reagan administration’s permissive approach to merger enforcement. Indeed, they further loosened restrictions on merger activity on the assumption that mergers produce efficiencies and benefit consumers.
Pricing Power and Capacity
These twin assumptions—that mergers result in efficiency, and that powerful corporations willingly share the benefits of efficiency with the public—have never been well-supported by facts. If anything, the bulk of evidence points in the opposite direction. As business school professor Melissa Schilling writes, “A considerable body of research concludes that most mergers do not create value for anyone, except perhaps the investment bankers who negotiated the deal.”
With the greenlight for consolidation, corporations have engaged in hundreds of thousands of mergers and acquisitions over the past four decades, which has contributed to high levels of concentration in many markets. In such concentrated markets, corporations have more power to raise prices unilaterally and collude with rivals, including through tacit and legal methods such as price leadership. For example, in meatpacking, processors appear to have used their individual and collective power to raise beef and chicken prices to consumers (and keep wages down for workers).
Critically, the general increase in the price level has given executives cover to exercise the pricing power they already have, which at other times might provoke strong reactions from customers and the public. A CFO of a supplier to food companies told the Wall Street Journal, “Widespread inflation makes it easier to broach the topic of raising prices with customers.” Comments like this suggest we may be in the midst of a profit-price spiral (as opposed to a wage-price spiral).
More generally, mergers involving large and medium-sized firms have concentrated power in a clique of executives and controlling shareholders. They have contributed to a political economic system that, in the words of Senator John Sherman (of Sherman Act fame), effectively “leave[s] the production of property, the transportation of our whole country, to depend upon the will of a few men sitting at their council board.” This power cascades up and down supply chains and pervades entire industries. Corporations in highly concentrated markets can depress prices to suppliers and workers. Mergers among rival employers may be one cause of the high levels of concentration among employers in many local labor markets in the United States, a phenomenon associated with significantly lower wages for workers.
A permissive posture on mergers has also had detrimental effects on the productive capacity of the United States. Corporations often eliminate “redundant” capacity following mergers, especially those involving competitors.
Consider the effects of hospital consolidation on health care capacity. In metropolitan areas and counties across the country, hospitals in the past few decades have gone on a merger and acquisition frenzy, concentrating local healthcare markets and obtaining extraordinary power over patients and payors. They have also closed hospitals and clinics that they deemed superfluous. Due in part to consolidation, the United States had 1.5 million hospital beds in 1975 but only 900,000 beds in 2017, even though the population of the country increased by more than 100 million during that period. As a result, the nation was much less equipped to respond to the surge in Americans needing hospital care during the pandemic.
Further, in many instances, corporations have opted to grow through mergers and acquisitions instead of the more socially beneficial method of investment and hiring. As the Supreme Court wrote in 1963, “[S]urely one premise of an antimerger statute such as § 7 is that corporate growth by internal expansion is socially preferable to growth by acquisition.” At the time, the Court recognized the qualitative difference between growth through internal expansion and growth through mergers:
A company’s history of expansion through mergers presents a different economic picture than a history of expansion through unilateral growth. Internal expansion is more likely to be the result of increased demand for the company’s products and is more likely to provide increased investment in plants, more jobs and greater output. Conversely, expansion through merger is more likely to reduce available consumer choice while providing no increase in industry capacity, jobs or output.
Twenty years later, echoing this analysis, two economists captured the cost of the 1980s lax merger policy: “Billions of dollars spent on shuffling ownership shares are, at the same time, billions of dollars not spent on productivity-enhancing plant, equipment, and research and development.”
The net result of permissive anti-merger policy is an economy in which corporations in many markets wield exceptional power and have less slack capacity to meet even modest increases in demand for goods and services. The pandemic has merely exposed the underlying structural problems in the American economy.
Reviving Anti-Merger Rules
When the DOJ and the FTC publish new merger guidelines, what if they revived strong anti-merger rules? What would be the benefits for society?
An example from the wireless industry illustrates the public benefits of cracking down on corporate consolidation. While the Obama administration generally had a weak record on antitrust enforcement against mergers and monopolies, the notable exception was in the telecom sector. In 2011, the DOJ filed suit to block AT&T’s acquisition of T-Mobile and ultimately forced the two corporations to abandon the merger. Obama’s antitrust and telecommunications regulators subsequently signaled that they would likely not permit further consolidation among the Big Four in the U.S. wireless industry (Verizon, AT&T, T-Mobile, and Sprint). In effect, the federal government told the Big Four they would have to succeed or fail on their own, not by joining forces with each other.
The result was a multi-year period of healthy price competition and growth in the wireless market. Despite merger proponents predicting failure for T-Mobile and a dramatic increase in the price of cell phone service in the event AT&T did not acquire T-Mobile, the carrier thrived in the following years. T-Mobile slashed rates on voice and data, introduced new pricing options, and stopped imposing long-term contracts on customers. T-Mobile upgraded its network too, with an aim to compete with AT&T and Verizon on both rates and service quality. T-Mobile engaged in internal expansion and instigated several years of beneficial price competition in a long-stagnant wireless market. Following its acquisition by Japanese firm SoftBank, even Sprint, the “sick man of wireless,” increased its capital expenditures and gained subscribers. The company’s CEO, confronting the choice of merge or expand, pledged to invest more in its network after merger talks with T-Mobile (temporarily) collapsed in November 2017.
In 2017, then-Federal Reserve Chair (and current Treasury Secretary) Janet Yellen attributed surprisingly low inflation at the time, in part, to “a large decline in quality-adjusted prices for wireless telephone services.” One of the nation’s top economic policymakers implicitly credited the Obama administration’s merger policy in one sector for securing broader price stability.
The dynamic competition in wireless proved comparatively short lived. In July 2019, the Trump administration allowed T-Mobile to acquire Sprint (subject to conditions), reducing the number of national wireless carriers to just three. A subsequent multistate suit to stop the merger was unsuccessful.
The U.S. wireless industry in the 2010s offers a case study on the public benefits of strong anti-merger law. The DOJ and the Federal Communications Commission directed the top four national carriers to grow principally through price competition and investment. A policy of no more mega-mergers in the industry kept rates in check and spurred dynamism in a previously sclerotic industry. A strong anti-merger policy applied across the economy could make such healthy competition the norm, rather than a newsworthy exception, in the United States.
This post is adapted from written testimony to the House Financial Services Committee in a hearing entitled The Inflation Equation: Corporate Profiteering, Supply Chain Bottlenecks, and COVID-19.