Merger/Acquisition Pricing Quantified in America

This week as I was browsing through the news, I came across an opinion piece that had a catching title, "Big Business Is Overcharging You $5,000 a Year". Intrigued, I read the article, which puts topics we've gone over in class in the real world. Thomas Philippon, a Frenchman, said when he first moved to America 20 years ago, he was surprised at how inexpensive things were compared to France and Europe. Now, comparing prices he pays to what his parents and the European public pay, he realized American prices are now higher! Philippon came to the US to pursue a graduate degree, went on to complete a Ph.D. in Economics at MIT, and is now a professor at NYU. As an economist, he wanted to answer the question of why prices in the US are now higher than they once were relative to Europe. The main cause he found was mergers and acquisitions; like the example in class with the train industry, companies are averse to actually competing because they risk losing. Having the government fix prices or restrict entry into the business's market or similar markets is preferred, as it extends the amount of time a business can enjoy an economic profit. Businesses could look to lower prices, but doing so would cause others to react, causing the industry to be less profitable.

This article reinforces Capture Theory and the group size discussions of Olson and Peltzman we went over in class. Many of the large firms that are driving up the price of living in the US were and are behaving rationally, as were the legislators that allowed the mergers. An example from the article is the Whirlpool and Maytag merger. The merger was justified by the companies as a way to lower costs and compete with foreign appliance manufacturers. Lawmakers, faced with the decision of potentially causing unemployment for thousands of voters if the domestic brands fail versus allowing two companies to "be more competitive", have an easy choice. Once the merger was completed, lobbying efforts to impose tariffs on foreign appliance manufacturers were successful, leading to higher prices for American consumers in the long run. Without the merger, Maytag and Whirlpool would have had more difficulty coordinating lobbying to keep out foreign producers; together they achieved the most durable form of rent, entry restrictions. According to Philippon's new book, these mergers and acquisitions have ended up costing Americans ~$5,000 a year.