Mergers are sold to regulators on the basis that the consumers will benefit. For example, Yahoo Finance reported the following after the Sprint-T-Mobile merger was approved:
“The company’s network will be able to offer unmatched value to consumers, with better service at lower prices. The enhanced scale and financial strength of the combined entity will drive a planned investment of $40 billion into its network and business over the next three years. Moreover, synergies achieved from the integration have the potential to unlock massive scale and deliver greater value to stockholders.” [emphasis added]
Anti-trust regulators adopted the consumer welfare standard, which ultimately holds as long as prices are predicted to decrease, the merger is all good. The way the story goes is that the merged company will reap "synergies" due to less overhead, which will benefit the consumer.
But predictions are one thing. Reality is another.
Professor John Kwoka “examined the price changes of 119 products before and after mergers and the establishment of joint ventures.” According to his study, he found:
Prices rise nearly 67% of the time.
In 1/3rd of the cases, prices rose at least 10% or more.
In 1/5th of the case, prices rose at least 20% or more.
A couple of other studies show a similar trend.
In one paper, economists noted that mark-ups have risen from 18% to 67% between 1980 and 2017. The cause? They put it as an "increase in average market power." Another study found that "most mergers examined in the nine studies conducted over the past 22 years resulted in increased prices for both the merging parties and rival firms, at least in the short run." The paper cited how breakfast cereal cost about 2.6% more, while engine oil rose between 3.9% to 8.1%.
Given this reality of “merger mania,” what are three ways the resultant monopoly can raise prices?
#1 Price-signaling: A Legal Way to Collude on Price?
Price signaling is a legal means for oligopolies to collude on price. Instead of meeting secretly, they tacitly agree on a price leader. Hermann Simon, a marketing and strategy consultant, notes that "General Motors in the driver’s seat. Other competitors accepted GM’s role as market and price leader in the days when its share stood at around 50 %. GM increased prices on an annual basis.” He goes on to say:
“Signaling is not illegal per se. As long as companies keep their communication relevant to everyone in the marketplace, including customers and investors, and do not go overboard, they are usually on the safe side. The Signaling must not have anything which implies or aims at an agreement or a contract, such as “if competitor X raises its prices, we will follow.”
#2 Predatory Pricing: Burn cash today; raise prices tomorrow
Predatory pricing is a well-known monopolist strategy. Lower prices now to kill cash-poor competitors. Either they agree to be bought, or they will perish. Amazon used this strategy with Quidsi, the owners of Diapers.com and Soap.com. They were able to sell the diapers at 30% below cost, where “Amazon was losing $7 for every box of diapers”. According to WSJ, “Senior Quidsi executives were even more surprised when, the day of the price cuts, Jeff Blackburn, a top lieutenant to Mr. Bezos, approached a Quidsi board member saying the company should sell itself to Amazon, said a person familiar with the matter. At that point, Quidsi wasn’t for sale and had big growth plans.” The article goes on to say: “Quidsi started to unravel after Amazon’s price cuts, said Leonard Lodish, a Quidsi board member at the time…The company felt it had no choice but to sell itself because it couldn’t compete with what Amazon was doing and survive. Amazon bought Quidsi in 2010 for about $500 million”.
What did Amazon do with Diapers.com? They shut it down in 2017, claiming it was "unprofitable"— one less competitor to worry about.
The lack of competitors was ultimately profitable. Amazon (not third-party sellers) was caught by activists raising prices during the pandemic. And that’s the power of predatory pricing. According to Public Citizen, Amazon was able to charge over $35 for a $24 bottle of hand sanitizer.
#3 Get Capitalists to give you Cash to Buy the market
The primary way, however, is to get funded by the Capitalists. Any company armed with enough cash from the capital markets (via stocks, bonds, etc.) can buy out enough of their competitors. Capitalists have explicitly stated this as a strategy.
Case Study #1: The Meat Market and Tyson Foods ‘Expand or Expire Strategy’
Consolidation of the meat industry is a fact: “1980, 40% of all American cattle farmers…have gone out of business while the big players have made dozens of billions of dollars of profit.”
How did this happen? Through funds raised via the stock market.
As Chris Leonard explains in the Meat Racket, Don Tyson's (head of Tyson Foods) "Expand or Expire" strategy was financed through his 1963 IPO, where he raised $1,000,000. With this money, he was able to address "two problems with one move. Tyson could expand, and it could expand without boosting the overall supply of chicken. Tyson simply bought out its competitor's market share, without adding one bird to the market."
The result? A farmer can’t find a cash market in Capitalist America where he can sell his cows:
“For eighteen weeks out of the year there was only one meatpacker bidding on the market. For a whole month there weren’t any bidders… So for twenty-two weeks of the year, there was only one or no buyers on the cash market.”
Leonard goes on to write:
“When asked why this happens, feedlot owners like Ken Winter just shrug. And then they smile a little bit. That smile seems to say: Come on, dummy. Why do you think it happens? The meatpackers quit competing. They divvy up feedlots so they can dominate buying at each location without having to bid up the price in an auction.”
Case Study #2: Amazon and the Capital markets Rescue that saved them
Amazon owes its existence to the capital markets:
The Vox article goes on to argue, "a lot of what ultimately made Amazon successful was invented only after the dot-com crash," noting the following innovations after securing the above funding:
Amazon Marketplace launched in November 2000
Amazon Prime started back in 2005
Amazon Web Services (AWS) started in 2006. AWS contributes to 57% of Amazon’s operating income.
Consequently, if Amazon didn't get that cash from the capital markets, they wouldn't: (1) have survived the 2000 dot-com crash, and (2) been able to devour the competition to be the monopoly they are today.
How does Islam prevent monopolies and the ‘closed markets of Capitalism’?
“Free markets” is code for "closed markets." It sounds like it's Orwellian, but it's not. Where freedom of ownership is prized, the participants are free to raise capital any way they like. This allows them to destroy the competitive market, but so what? That's freedom. Pete Thiel and other capitalists like free markets, but not competitive. Thiel, co-founder of PayPal, to his credit, is quite open about this, stating that: "Competition is for losers…If you want to create and capture lasting value, look to build a monopoly.”
Without the capital markets, Amazon-size monopolies would not exist, i.e. the real market would have shut down Amazon back in 2000 but was stopped by the capital markets. For markets to function as a check against monopoly power, the capital markets need to be closed.
In Islam, a company can't raise money on the stock market, bond market or even get a bank loan. Instead, they must either fund themselves through interest-free loans (i.e. from 'friends & family'), their own operations or bring in partners. The latter is quite risky as they will lose control, so a business person can't bring in an unlimited number of partners.
But what if a business were to become a monopoly through an Islamically legal way? In Islam, such an outcome is categorically prohibited. Prophet Muhammad (saw) said:
“No one monopolizes except the wrongdoer.” [Muslim]
In such a circumstance, the State would need to compete with that monopoly. For example, Umar ibn Al-Khattab (ra) brought supplies from Egypt and ash-Sham into the Arabian Peninsula. A famine had wiped out supplies, and consequently, the prices of goods were rising. So instead of instituting price controls, the answer was to break the monopolies through expanding the supply. According to At-Tabari, Amar bin al-Aas’s suggested to Umar bin-al Khattab (ra), "If you want the price of food in Medina to be on the level of that in Egypt, I shall excavate this latter waterway again and build bridges across it." The waterway he was referring to is thought to be near the present-day Suez Canal near Egypt. Umar (ra) approved Amar's idea. This illustrates how the State can be (1) creative on how to ramp up supply of the alternative and (2) make serious investments to eliminate the monopoly power of the dominant company/ companies.