Business World Both Monopolies and Term Paper
- Length: 10 pages
- Subject: Business
- Type: Term Paper
- Paper: #91452238
Excerpt from Term Paper :
Since the monopoly controls so much of the market share, the producers of goods have no choice other than to sell to the firm at lower prices, meeting their demand. This causes the market to stagnate, in that the producers of the goods must increase their production, but lower their margins (Federal Trade Commission, 2002).
The same occurs for merged companies. Regardless of the type of merger, the end result is a larger company with a higher percentage of the market share. Again, this means that producers of any goods provided by the merged firm must sell at a lower cost to maintain the business of the firm. This leads to lower margins for the producers and higher profits for the merged firms (Federal Trade Commission, 2002).
There is also concern with both mergers and monopolies about ethical business practices. In a free market economy, resources and commodities are allocated and distributed justly, in that there is respect for both the producer and the consumer, and both are protected through competition. In a monopoly, however, this competitive protection is gone. This allows the market to be controlled by a single firm or few firms, and thus allows for unethical business practices. In some cases, these practices include competition intimidation, forced buyouts, price fixing, low wages for workers to keep overheads at a minimum, and intended market shortages, which raise prices to consumers (Valasquez, 2002).
Merged companies can have the same affect. Particularly in the case of buyouts, larger merged companies have more retail buying power, and thus, have more ability to buy out smaller competitors. This reduces competition, and thus reduces consumer choice. The larger the merger is, the more likely the merger will allow the firm to control the market. Smaller competitors are more likely to follow the pricing of the larger firm, out of fear of buyout or further market loss. Additionally, mergers can cause intended shortages in any given market, which again can raise the prices to consumers (Valasquez, 2002).
One of the major ethical concerns about both monopolies and mergers is the forced manner in which they conduct business with suppliers. In both cases, the firms have a large enough corner on the market that they have enough buying power the force producers to sell components or goods at a lower margin. If a producer does not, the firm will look elsewhere for the supplies, and since their corner on the market is so vast, the result for the supplier is devastating. This in and of its self is part of a free market economy. However, the results of such actions are a drastic loss of profit for the suppliers and producers. This often leads to relocation of factories and production plants to other countries, where labor, land, and materials can be obtained for less cost. This causes a lack of jobs locally, and a tendency for short supplies. Those short supplies allow for monopolies and merged companies with a higher market share to raise prices. Since there is little to no competition, and since the monopolies and merged companies have received the products at lower costs, and have a lower overhead, their profits stand to increase far beyond those in the competitive markets. In both monopolies and merged firms, these ethical concerns for the "strong handed" tactics with producers and suppliers is a major source of contention (Valasquez, 2002).
To truly illustrate the astounding power of monopolies and mergers, one simply needs to view examples of them in today's business world. Microsoft Corporation is one of the largest companies on the planet, and there can be no question of its position as a monopoly in the software market. Primarily, Microsoft holds power over the components installed on new computers shipped by such companies as Dell and Compaq, since Microsoft's Windows Operating System is one of the only operating systems available. Since without an operating system, computers are useless, the manufactures of ready-made computer systems have no real choice other than to place the Microsoft Operating System onto the new computer systems. They are charged a high price for this ability, which is then passed to the consumer upon purchase of the system. In this way, Microsoft Corporation is able to price its operating system and other software at any price they choose (U.S. Vs. Microsoft, 1999).
Part of this ability comes from Microsoft's huge market share. Microsoft holds at least 90% of the market share for Intel-compatible operating systems. Other companies wishing to enter the market have almost no chance of doing so, since most applications are written for the Windows-based operating system. Consumers generally will not purchase an operating system for which there are no runnable applications (U.S. Vs. Microsoft, 1999).
For those who have created products similar to Microsoft's, such as Netscape's Navigator, the results have been a constant barrage of tactics to pressure them to halt development on any product in competition with Microsoft. Netscape, Intel, Apple, IBM, RealNetworks, and a host of other companies have reported similar results. Additionally, Microsoft uses the distributors of new computers to again oust the competition. Because computer manufacturers want to use the Microsoft platform, Microsoft can easily require that their own software, such as Internet Explorer, be bundled with the operating system. This effectively negates any competition (U.S. Vs. Microsoft, 1999).
To see the economic effects of merger, one needs to look at the AOL/Time Warner merger. In the merger, the largest media conglomerate and the largest internet service provider were combined to form a digital media giant that held positions of domination in publishing, news, Internet, cable, and music industries. Combined, the company had unrivaled assets among other online and media companies. Additionally, the merger provided AOL with access to over 13 million cable subscribers, which simply furthered their position in the market (CNN, 2000).
With the merger, many rival companies were outraged over the anticompetitive environment the merger would bring about. With Time Warner's high-speed internet access, and with AOL's existing internet services, competitors have a more difficult time gaining access to both new technology and new customer bases. Since the AOL/Time Warner market share is already massive, smaller companies cannot compete. Additionally, the merged company can easily force manufacturers of the components necessary for use, such as cable modems, lines, and routers to sell the components at a lower margin (CNN, 2000).
With such a large portion of the market share already owned, AOL/Time Warner was in a position to heavily control pricing of services in the market. Through intimidation, advantage, and simply buying power, the AOL/Time Warner conglomerate could, in some areas of the country, operate with very little competition, at pricing far higher than in areas with at least some competition. Additionally, with continued buyouts of smaller, potential rivals, the media giant could easily continue to rule the media and internet markets. In essence, the merged company allowed the firms to form a combined monopoly (CNN, 2000).
There are also companies who walk the fine line between being a monopoly, and falling under a free market economy. Wal-Mart, for example, has a massive corner on the retail industry, boasting higher revenues that K-Mart, Target, Sears, J.C. Penny, and Kroger combined. Their huge market share allows them to "squeeze" their 21,000 suppliers into selling products to them at astoundingly low margins, simply because the sales generated for those products by Wal-Mart equals up to 40% of those producers sales. Wal-Mart can then sell those products at drastically reduced prices to consumers, and still make a higher profit than those of other, competing retailers. Smaller locally owned stores cannot compete, and their business fails (Fishman, 2003).
Ethically, Wal-Mart and companies like them fall into the same realm as those of monopolies and merged companies. Their concern is for overall profit, and not for the smaller competitors nor for the suppliers. Outwardly, the consumer may benefit, but on a broader scale, firms such as Wal-Mart are just as disastrous to the economy as monopolies, contributing to job loss in the country, an overall stagnant economy, pressure on producers, and an uncompetitive market. These firms may not be monopolies by definition, since there are alternatives, but their business practices and overall effect on the economy are the same (Fishman, 2003).
Mergers and monopolies are both concerns for the overall market. In many cases, mergers result in a near-monopoly hold over the market, which allows the newly merged firm to have the same affects on the economy. Both tend to have a high market share, are free to raise prices as they see fit, and are free to force producers to sell at a lower margin, creating even higher profits. Both stagnate the market, and reduce innovation, as well as creating a situation of job loss and overall revenue loss for everyone but themselves. Additionally, both often employ unethical business practices such as price fixing, competition intimidation, and purposefully shorting the market to raise profits.