When Time-Warner announced it planned to merge with another major communications
firm, many feared the new company would exercise near-total monopoly power.
These concerns led some to call for government action to block the merger in
order to protect both Time-Warner's competitors and consumers.
No, I am not talking about Time-Warner's recent announced plan to merge with
AT&T, but the reaction to Time-Warner's merger with (then) Internet giant
AOL in 2000. Far from creating an untouchable leviathan crushing all competitors,
the AOL-Time-Warner merger fell apart in under a decade.
The failure of AOL-Time-Warner demonstrates that even the biggest companies
are vulnerable to competition if there is open entry into the marketplace.
AOL-Time-Warner failed because consumers left them for competitors offering
lower prices and/or better quality.
Corporate mergers and "hostile" takeovers can promote economic efficiency
by removing inefficient management and boards of directors. These managers
and board members often work together to promote their own interests instead
of generating maximum returns for investors by providing consumers with affordable,
quality products. Thus, laws making it difficult to launch a "hostile" takeover
promote inefficient use of resources and harm investors, workers, and consumers.
Monopolies and cartels are creations of government, not markets. For example,
the reason the media is dominated by a few large companies is that no one can
operate a television or radio station unless they obtain federal approval and
pay federal licensing fees. Similarly, anyone wishing to operate a cable company
must not only comply with federal regulations, they must sign a "franchise"
agreement with their local government. Fortunately, the Internet has given
Americans greater access to news and ideas shut out by the government-licensed
lapdogs of the "mainstream" media. This may be why so many politicians are
anxious to regulate the web.
Government taxes and regulations are effective means of limiting competition
in an industry. Large companies can afford the costs of complying with government
regulations, costs which cripple their smaller competitors. Big business can
also afford to hire lobbyists to ensure that new laws and regulations favor
big business.
Examples of regulations that benefit large corporations include the Food and
Drug Administration's (FDA) regulations that raise costs of developing a new
drug, as well as limit consumers ability to learn about natural alternatives
to pharmaceuticals. Another example is the Dodd-Frank legislation, which has
strengthened large financial intuitions while harming their weaker competitors.
Legislation forcing consumers to pay out-of-state sales tax on their online
purchases is a classic case of business seeking to use government to harm less
politically-powerful competitors. This legislation is being pushed by large
brick-and-mortar stores and Internet retailers who are seeking a government-granted
advantage over smaller competitors.
Many failed mergers and acquisitions result from the distorted signals sent
to business and investors by the Federal Reserve's inflationary monetary policy.
Perhaps the most famous example of this is the AOL-Time-Warner fiasco, which
was a direct result of the Fed-created dot.com bubble.
In a free market, mergers between businesses enable consumers to benefit from
new products and reduced prices. Any businesses that charge high prices or
offer substandard products will soon face competition from businesses offering
consumers lower prices and/or higher quality. Monopolies only exist when government
tilts the playing field in favor of well-connected crony capitalists. Therefore
those concerned about excessive corporate power should join supporters of the
free market in repudiating the regulations, taxes, and subsides that benefit
politically-powerful businesses. The most important step is to end the boom-bust
business cycle by ending the Federal Reserve.
