American Businesses - Monopolies
merger companies microsoft company
A monopoly exists when a business controls all or almost all of an entire industry. A business with a monopoly is able to charge unreasonably high prices in the absence of the competition that generally drives prices down. Consumers, in turn, would have no alternatives, and would have to pay the high prices or do without the goods or services. Since the late nineteenth century the U.S. government has tried to prevent companies from growing so large and powerful—whether on its own or through a merger, a buyout, or a takeover—that it could establish a monopoly in its industry.
A series of federal laws and regulations, including the Sherman Antitrust Act of 1890 and the Clayton Antitrust Act of 1914, are used to prevent monopolies. (A "trust" is another name for a monopoly.) The government often moves to break up monopolies when a single company controls 30% or more of the market in a given industry, but that is not a hard-and-fast rule. A company can control far more than 30% of a market and not be considered a monopoly if it has competitors that control similar percentages of the market, keeping prices low and services affordable for consumers.
Most enforcement of antitrust laws falls under the domain of the U.S. Department of Justice. Table 5.7 shows a breakdown of antitrust investigations conducted by the Department of Justice between 1994 and 2003.
The government can use its antitrust powers to prevent companies from merging, if it feels the result of the merger will give the resulting company a monopoly in its industry. There are two different kinds of company mergers. A horizontal merger is a merger between direct competitors. For example, a merger between Ford and General Motors would be a horizontal merger. Because a horizontal merger eliminates a direct competitor altogether, they run the greatest risk of violating antitrust laws. In a vertical merger, on the other hand, two companies from different levels of the same industry combine—for example, when a manufacturer merges with a supplier or a distributor. While there is less risk of violating antitrust laws with a vertical merger than with a horizontal merger, it is still possible for a vertical merger to be anticompetitive because it may be more difficult for direct competitors to access the services of the companies that have been combined.
Mergers do not necessarily lead to monopolies. They often create companies that can operate more efficiently by combining a variety of different functions and, therefore, lead to lower prices for consumers and greater availability of products. In November 2004 the major retail department stores Kmart and Sears Roebuck Co.—both of which had experienced a drop in sales and financial instability—announced a merger plan that would create the third-largest retail chain in the United States, with annual profits expected to reach $55 billion (Steve Inskeep, "Kmart and Sears Plan Merger," Morning Edition, National Public Radio, November 17, 2004). After the announcement, shares of both companies' stocks rose dramatically, indicating almost immediate investor confidence in the plan.
The recession that began in 2001 reduced the number of domestic mergers and acquisitions from a peak in 2000. But by early 2004 merger activity seemed to be on the upswing. During the first three months of that year, there were 7,295 mergers with a total value of $709.7 billion—up from 6,584 mergers worth $406.2 billion during the same period a year earlier, according to data published in The European M&A Market-Year-to-Date.
Lack of competition doesn't just lead to higher prices. The consolidation of media companies has led to concerns that if most television and radio stations and newspapers are owned by just a few large corporations, they will present an unbalanced view of world events and will force small, local news organizations out of business. At the heart of the debate over big media mergers is the question of democracy itself; opponents of the mergers argue that by offering a narrowed interpretation of the news, huge media conglomerates actually stifle free speech and individuals' rights to express themselves. In June 2003, however, the Federal Communications Commission (FCC) voted to loosen media ownership regulations, allowing unprecedented ownership capabilities for the media giants. By the early twenty-first century much of the industry has come to be controlled by just a few major television, radio, and newspaper organizations. For example, as of 2004, Time Warner's holdings included Internet service providers AOL and Netscape Communications; television networks CNN, TBS, TNT, HBO, and the Cartoon Network; magazines such as Sports Illustrated and People; DC Comics; and the Atlanta Braves baseball team. Viacom owned CBS, UPN, MTV, VH1, Nickelodeon, Comedy Central, Infinity Broadcasting, Paramount Pictures, and Simon and Schuster publishing, among others.
In 1984 the Federal Communications Commission (FCC) intervened to break up a near-monopoly in telephone services by American Telephone and Telegraph (AT&T). The FCC's actions led to the breakup of AT&T, "Ma Bell," into several smaller companies, and the regional or "Baby Bells," which included a much smaller AT&T. Years passed, and the telephone industry saw dramatic changes with the rise of the Internet and cellular phones. AT&T attempted to merge with one of the Baby Bells, SBC Communications, in 1997, but the merger was prevented by the FCC, which argued that a merger between the companies could eventually amount to a monopoly of the telecommunications industry. But in January 2005, the industry having been in crisis for several years, the two companies announced that they would again attempt to join. This time, it was SBC that wanted to buy AT&T. Leslie Cauley wrote in USA Today, "The transaction, should it go forward, stands to transform SBC, already the USA's second-largest regional Bell company, into a global powerhouse. It also would be a further reconstitution of the former monopoly known as Ma Bell, which was broken up by court decree in 1984" ("SBC, AT&T Discuss Merger," http://www.usatoday.com/money/industries/telecom/2005-01-27-sbc-att, January 27, 2005).
In 1993 the Department of Justice began an investigation of software company Microsoft based on allegations that the company was engaging in unfair competition. Microsoft's Windows program already dominated the operating systems market. By bundling Web browsers and other applications with Windows, Microsoft made it difficult for other companies to compete in the market for these other applications as well. In 1994 Microsoft reached an agreement with the Department of Justice, and the company agreed to stop bundling other products with Windows. In 1998 Microsoft was accused of violating its agreement, and the Department of Justice and the Attorneys General of twenty states brought an antitrust suit against it. Microsoft reached a settlement in the case but still faced a number of class-action lawsuits. (A class-action lawsuit is one that is filed by a large group of people, all of whom accuse a single company of engaging in the same illegal acts against them.) In 2003 the European Union (EU) and the Japanese Fair Trade Commission both accused Microsoft of discouraging competition and breaking fair licensing agreements. In December 2004 the European Court ordered Microsoft to pay a fine of $613 million for violating the EU's competition law; Microsoft appealed the judgment. Other class-action lawsuits were pending in early 2005, and Microsoft had been ordered to pay billions of dollars in fines and damages.