1. Mergers – two types
· Large company buys small company: Cisco or Microsoft acquires a smaller company.
· Friendly: Both companies agree to the acquisition.
· Hostile: Larger company buys up all the stock of the smaller company to take it over without the approval of the company’s management.
· Two companies of equal size agree to become one: Disney buys ABC; AOL buys Time Warner.
· When all of the companies in an industry merge, you’re left with a monopoly.
· Definition: An industry or market dominated by one company. New rivals can’t enter market because they can’t compete with the price or quality.
· Good monopolies: Utilities regulated by government. It’s too expensive for more than one company to provide the service, so government allows a monopoly, but regulates it to protect consumers. Examples: PG&E (power lines and generators expensive), cable TV (cable lines), trash (trucks), water service (pipes), telephones (AT&T – overhead wires – but deregulated in 1984.
· Other types of monopolies: Patents and trademarks – monopoly on that product, designed to encourage development. Example: Prescription drugs - recover investment and make a profit for a while. Encourages development – one company would invent, another company would copy the drug, and the investing company loose all its investment.
· Bad monopolies: Microsoft. Why is it bad?
· Not because they are the only manufacturer of a product – being the best and the customer’s top choice is ok, but because of how they sell their product.
· Netscape invented the web browser, but then Microsoft came up with IE. Microsoft bundled IE together with their other software, so that almost all computer users had IE already installed on their computer. So they naturally used IE instead of Netscape. When MS distributed IE with its other software, that got them in trouble. Plus they did it with the intent to destroy Netscape.
· Definition: Product or service industry dominated by a few large companies.
· Rule of three: There are only room for three major players in any one industry. There are other niche companies, but they never get as large as the three.
· Telephone companies: AT&T, Sprint, MCI
· TV Networks: CBS, NBC, ABC.
· American Cars: GM, Ford, Chrystler.
· Fast food: McDonalds, Burger King, Wendy’s
· Cereal: Kellogg, General Mills, Post
· Cigarettes: Philip Morris, RJ Reynolds, Brown & Williamson
· Airlines: United, American, Delta
· Internet (for a while): AOL, Compuserve, Prodigy
· In the business cycle of an industry, at first there will be one player, then many players, and then they will consolidate into three large companies which will control 70% of the market. Right now with the internet, we are seeing a lot of consolidation – buying up of companies.
· These companies compete with each other for customers, but know that it is important to keep all three alive. If all three companies were to get together and agree to raise prices simultaniously, consumers would have no choice. That is called collusion, and it is usually illegal. Examples:
· Oil. Most oil producers belong to a cartel called OPEC (Organization of Petrolium Exporting Countries), and they collude to set prices. Illegal in US, but this is foreign companies. Smart for them to do this.
· They may all agree to reduce production, which limits supply and raises prices. But if prices go up because of an agreement, if one company breaks the agreement and reduces prices, they’re going to get all the business.
· Another example: Airlines – all of the airlines raise their prices, then one lowers them, and they all lower. Repeat. If government can show that they agreed to do this, it’s illegal. If one did it and the others copied, not illegal.