NEWS ANALYSIS : Mergers’ Benefits to Consumers Often Overstated

With the recent spate of merger announcements--from Lockheed-Martin Marietta to Federated-Macy to Yucaipa-Ralphs Grocery--the issue of what happens to prices after companies join forces has bubbled to the top once again.

So when companies conspire to combine, do consumers end up paying more for goods and services?

Economists love to straddle the fence on this one. But one thing is clear: The claims of many merger partners that their unions will result in economies of scale that translate into savings for customers are often simplistic and exaggerated.

Such savings are often confined to the early months or years of a merged corporation, with few lasting effects, antitrust experts say. And even if the new efficiencies live on, they can frequently be offset by the price freedom that reduced competition creates.

In the merger expected to be announced shortly between Ralphs and the owner of Alpha Beta, a single company would garner 27% of Southern California’s grocery market--a figure that sounds alarm bells for several antitrust experts despite the relatively robust supermarket competition that would remain.

“From the consumer’s point of view, when you have over-concentration and reduced competition over time, you’re going to have higher prices,” said John K. Van de Kamp, a former California attorney general who challenged high-profile grocery store mergers in the 1980s.

From this country’s beginning, Americans have vacillated between loving and hating big business. By the late 1800s, vast wealth had accumulated in the hands of individuals and companies. Hostility against monopolies in general and, specifically, the Standard Oil Co. “trust” built by John D. Rockefeller led to passage of the Sherman Antitrust Act in 1890. Under that law, many individuals and firms were punished for fixing prices or agreeing to share markets.

By 1914, legislators had concluded that trust-busting alone was not enough. That year, the Clayton Antitrust Act outlawed unfair price discrimination and mergers that would substantially reduce competition or tend to create a monopoly. Separately, the Federal Trade Commission was established as a regulatory body.

All the safeguards, however, have not deterred businesses from embarking on waves of bigger-is-better consolidation: mergers in the 1920s, the formation of conglomerates in the 1960s and 1970s, the leveraged buyouts of the 1980s and the renewed merger mania of the ‘90s.

Logic would dictate that prices have ratcheted upward from all this merging. But a number of what economists like to call “confounding variables”--global trade, inflation, cuts in defense spending, recessions, improvements in technology--routinely intervene to mess up the tidy formula.

As a result, in recent times, an automatic link between mergers and higher prices has proved tricky to establish, academicians say. “It’s difficult to point to any industry where mergers have created monopoly power . . . and increased prices,” said Randolph Westerfield, dean of the USC School of Business Administration.

The government’s ardor for antitrust enforcement has waxed and waned. During the administrations of Presidents Ronald Reagan and George Bush, for instance, officials gave their blessing to mega-deal after mega-deal among department stores, grocery stores and manufacturers. In many cases, they cited the economic benefits that could result as U.S. companies pooled their resources to compete in an increasingly global economy.

By contrast, the Clinton Administration has given the appearance, at least, of scrutinizing mergers more closely. And officials say the issue of whether mergers will hit consumers in the pocketbook is always foremost in their minds.

“If you had to boil merger analysis down to one question, it is: Will prices go up after the merger?” said Steve Sunshine, a deputy assistant attorney general in the antitrust division at the U.S. Justice Department.

The chief goal at Justice and the FTC, which share responsibility for antitrust enforcement, is to stop any mergers that would prove anti-competitive. And generally, academicians and economists agree, they succeed. However, “some undesirable mergers squeak through,” acknowledged Richard Gilbert, chief economist in Justice’s antitrust division.

Take two airline mergers approved in 1986--over the objection of the Justice Department--by the Department of Transportation, which then had such powers. A 1991 study by Justice showed that the merger of TWA and Ozark caused a slight increase in fares and a significant reduction in service. Meanwhile, the union of Northwest and Republic caused substantial increases in fares and a big loss of service.

In 1992, the FTC’s Bureau of Economics found mixed results when it looked into the effects on product prices of “horizontal” mergers--unions between two competing companies selling a similar product or service.

In one case study, the economists showed that prices rose substantially after the merger of two firms that produced titanium dioxide, a pigment used to make paints, paper and plastic. Yet an analysis of the union of Hawaii’s only two cement producers revealed a significant decrease in prices, attributed to efficiencies created by the merger along with Hawaii’s access to low-cost Asian imports.

That sort of murky picture is often the result when economists set out to assess how prices behave after a merger. So many changes can intrude--a factory explosion, the entry of a new competitor, a natural disaster--that it’s tough to pinpoint precise causes.

To a great extent, whether prices rise or fall after a merger, economists say, depends on why the companies merged in the first place. Recent defense and banking mergers, for example, generally have been reactions to shrinking markets and are motivated by the need to survive--a rationale usually endorsed by regulators. Another “good” motive would be the replacement of bad management.

But companies’ arguments that a merger or acquisition will achieve economies of scale that can be passed on to customers as lower prices are “very overblown,” said USC’s Westerfield. Such efficiencies often are one-time phenomena and not an ongoing savings to consumers.

“Most evidence suggests that economies of scale come pretty early (in a merger) . . . and don’t really justify a lot of ‘M & A’ activity,” Westerfield Said. “If economies of scale were that significant, there wouldn’t be any small banks out there, and there are plenty of small banks doing quite well.”

In addition to prices, regulators must consider a merger’s likely effects on service and innovation--factors that are even harder to measure. Concern over innovation recently led the government to block two mergers between makers of personal finance software--Intuit with Legal Knowledge Systems and ChipSoft with Meca--that routinely had leapfrogged each other with inventive products.

Consumer groups have taken aim at the banking industry, where they say an ongoing consolidation has had a chilling effect on services. After Bank of America swallowed Security Pacific National Bank, critics watched in dismay as some services disappeared and various nuisance fees materialized.

“Some people are being charged for using the teller rather than the ATM,” complained Anna Alvarez Boyd, director of advocacy for Consumer Action, a San Francisco group.

With antitrust enforcement lax at the federal level during the Reagan and Bush years, state attorneys general began to take a lead on challenges, which are perceived as politically popular. California Atty. Gen. Dan Lungren is expected to look closely at the Ralphs-Yucaipa deal.

And in New York, the state attorney general’s office has threatened to block the merger of Federated and R.H. Macy and to undo Kraft General Foods’ acquisition of RJR Nabisco’s ready-to-eat cereal business.

At issue in both cases is what decreased competition might mean for prices. Despite the already high cost of cereals, the Kraft-Nabisco merger has its backers. One consultant serving as a pro-merger witness said consumers could actually benefit because the companies’ joint market share--15%--would strengthen their stance against Kellogg and General Mills, which between them own about 60% of the market.

Similarly, consolidation of outlets in highly localized market areas is also of concern in the planned Ralphs-Yucaipa merger. The potential of too much local “market power” prompted California’s attorney general years ago to successfully fight a similar merger between two grocery powerhouses--Lucky and Alpha Beta.

How did consumers fare?

“I’m confident grocery prices would have been considerably higher had that merger gone through,” said Michael Strumwasser, an attorney with a Santa Monica public interest law firm who at the time was a special assistant to Van de Kamp.

Yet in retailing in general, one consulting firm has found no evidence of rising prices in the wake of the 1980s merger boom.

Nonetheless, reduced competition is, sooner or later, likely to injure consumers.

“Take a supermarket merger,” said Carl Shapiro, an economics professor at UC Berkeley.

“Maybe consumers will pay a dime more for milk,” Shapiro said. “That sort of power won’t ruin people’s lives, but it will take its toll. People don’t want to drive a mile or two to save a dollar on a basket of groceries.”