Government Regulation Is Needed, Citing the Major

¶ … government regulation is needed, citing the major reasons for government involvement in a market economy.

Markets can serve as efficient methods to distribute and allocate resources. However, there are many cases in which the system can actually produce severe inefficiencies. One problem that the world is currently facing is accounting for externalities; especially in regards to environmental issues and climate change (Tietenberg & Lewis, 2000). Other examples can include monopolistic conditions in which firms can charge more for their products and services than under conditions of competition.

Other inefficient economic conditions that can arise under situations of monopoly or oligopoly are that there are significant barriers to entry in the industry. These barriers are constructed by factors such as high fixed costs, availability of resources, and brand loyalty. Smaller firms that wish to enter the market will not have the necessary resources to compete with these large firms. Also in the oligopoly structure, market shares generally change very little from year to year. Many of the gains made in market share are through acquisitions of smaller competitors in the industry which are then consolidated into the parent firm.

Justify the rationale for the intervention of government in the market process in the U.S.

There are many situations that arise in which government intervention in the markets is definitely warranted. One fairly straightforward example can be provided by services such as utilities, cable, water, and internet services (Michaels, N.d.). Each of these services requires a great deal of physical infrastructure to be developed before the services can be provided. Therefore it would not make sense for companies to compete in these industries because it would require multiple infrastructure systems that would led to massive inefficiencies.

Other reasons that the government should intervene in markets include anything that can serve to throw supply and demand out of equilibrium and create market inefficiencies. Since the goal in most economic activity is to maximize profitability, if you follow this to its logical conclusion over a long enough time period it is reasonable to speculate that one firm will eventually come to dominate the market. In some industries the time period is shorter while in others it can take many decades, even centuries. Therefore, government intervention is needed to ensure that there is always a fair level of competition in the system. If the system becomes unbalanced, then the consumer, as well as the society in general, can be burdened with the costs.

Assuming that the merger faces some threats and that the industry decides on self-expansion as an alternative strategy, describe the additional complexities that would arise under this new scenario of expansion via capital projects.

If and industry decides on self-expansion as opposed to growth through acquisition then there are also risks that arise in this situation as well. During a merger there can be many sources in which the two firms combined gain some synergistic efficiencies. This can arise from technology sharing, sharing knowledge, complementary business processes, creating quantities of scale, and many other factors. Therefore sometimes the value of the combination of two firms is actually greater than the sum of the parts (financially and otherwise).

However, in a self-expansion strategy, from an industry perspective, there will be much inefficiency that arises. These might include items such as redundancy in capital projects, physical infrastructure, technological infrastructure, or duplication of other processes or resources. Therefore, there must be some balance between competition and efficiencies that can be gained through mergers in any industry. This will depend on the circumstances as well as the industry and should be considered on a case by case basis.

Analyze how the different forces will come together to create a convergence between the interests of stockholders and managers.

Mergers and acquisitions can be a very valuable option for a company's executive management team. Often the management teams on both sides of a merger or acquisition get a combination of special benefits through employment relationships, parachute increases, or bonuses (Fich, Rice, & Tran, 2011). Therefore, the CEO and the management team can gain significant personal wealth by initiating such a deal. This creates a situation in which the leadership may not necessarily have the shareholders best interests in mind and may be focused more on their own personal benefits.

If this situation arises then the shareholders can be negatively impacted by a merger or acquisition. In order to fulfill such an arrangement in an acquisition for example, the acquiring firm generally has to pay a market premium for their target. In some cases the premium maybe justified because of the synergies that will be gained in the deal. However, in many cases the premium does not add any long-term economic value for the shareholders. Furthermore, the management team may be motivated by their own personal benefit and be interested in a M&A even though it does not provide value for shareholders; or in some cases, it can actually devalue the shareholders' investment.

Speculate about the implications for the goals of the firm as to whether to maximize the industry's profits or to create more value for the shareholders.

The industry that was considered was the non-alcoholic beverages industry. There is currently an oligopoly, or at least an industry that is approaching oligopoly. However, despite the potential oligopoly structure of this industry, there appears to be a fairly high level of competition. Coke and Pepsi have been competing directly for nearly a century and the struggle between the companies has become heated at times. However, both companies do know that it is in their best interest to maintain the industry conditions. Therefore, even though they do compete there is at least some amount of hesitation in regards to the level of competition.