Government May Improve Markets, Essay Example

Pros of Government Action

One of the benefits of the government stepping in to prevent the merger between Mega Corporation and BIG Enterprises and, thus, a monopoly is that it will maintain competitive environment in the industry. This may benefit consumers through lower prices due to competition between the two companies. Another benefit is that the government will also be protecting the interests of suppliers who will lose considerable negotiating power against the newly formed monopoly with 80 percent of the market share. The government may also help prevent rise in the overall cost of living for the consumers because consumers do not only buy sugar directly but also consume several products that use sugar. The rise in cost of products that use sugar may be significant for especially those with low income.

The government intervention may not only prevent competition from declining now but also in the future. If the merger goes ahead and creates a monopoly with 80 percent market share, the remaining players may have little choice but to seek mergers or acquisition of competing players themselves in order to enhance their competitive position. Thus, this will only further reduce competition in the industry.

The sugar industry may seem like a commodity industry where innovation has little place but examples in other countries like the U.S. show that innovation potential exists even in the most basic commodities market, too. As concerns about obesity rise, it is possible that one of the major players may innovate to come up with a substitute product for sugar to develop a competitive edge. But such incentive for innovation may not exist if the merger goes ahead due to significantly reduced competitive pressure. Monopolies even reduce innovation in industries that have historically thrived on innovation such as personal computing sector. Microsoft serves as a great example in this regard. There was a time Internet Explorer was a default browser for most consumers due to dominance of Microsoft Window Operating System but today consumers have many more choices because regulatory authorities tackled Microsoft’s monopoly practices.

One benefit of government intervention will be that it will continue to encourage more players to enter the industry. But if the merger goes ahead, the newly formed company may become too big and powerful that it will discourage many new entrants due to higher risk of failure.

Cons of Government Action

One of the potential disadvantages of government stepping in to prevent merger is that it may be preventing lower prices for consumers. The two companies may yield significant cost savings after merger through economies of scale that the price of sugar decreases for consumer despite low competition. Another con of government action is that it may reduce government tax revenues since the newly formed company may have higher profits due to economies of scale as well as greater price power.

Another con of government intervention to prevent the merger between two companies will be that it will introduce inefficiency in the sugar industry. The merged companies may be more efficient due to economies of scale and may also dispose duplicated assets. Government’s intervention may also create the impression that it doesn’t treat all market players equally if smaller companies had been allowed to merge or acquire in the past.