Corporate Economic Power: Concentration or Fragmentation

Mgt205A | Alcala|Anni|Calibo|Pendon|Ramos

Background

CORPORATIONS

GOVERNMENT

IMPORTANT! Please do read the notes below. NATIONAL ECONOMY

Status Quo and Perceived Problem

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There are apprehensions with regard to the economic power of large corporations in the American economy. Many critics (prominent are members of Congress; circa1950-1980) of these high-earning corporations maintain that these corporations have effectively become monopolies, thereby having discretionary decisions to prices and quality of products, therefore, harming the welfare of consumers, the general public.

Question
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In line with Corporate Social Responsibility, should these corporations willingly fragment themselves by virtue of public policy, i.e. restrictions to further increases in total economic value of the corporations?

Breakdown of Questions
We should answer the following questions to answer the over- arching question? ` Are there actual oligopolies, if not monopolies, of large corporations in status quo just as what corporate critics maintain? (A positive answer to this question refers to the conventional criticism.) ` What does the conventional criticism suggest of public policy? ` What is the dynamic perspective which directly opposes the conventional criticism and what does it suggest of public policy?

Are there really corporate oligopolies/monopolies?

What is a monopoly and why are we so afraid of it? A monopoly, simply is the event wherein one controls the supply for a population. Since we assume that the product is sought after by the public, the one who monopolizes has the final and sole decision with regard to price control and quality. We are afraid of it because we are merely dancing on the palm of the suppliers just to have what we need/want even if the product is not of good quality. We basically do not have any choice in the context of a monopoly! Moreover, this gives unjust enrichment to the one who monopolizes!
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Are there really corporate oligopolies/monopolies?

What is an oligopoly and why are we so afraid of it? Just think of a group of corporations conspiring together to dictate the price of a particular commodity and effectively destroying competition. It is basically monopoly only that price and quality is controlled by a few and not only one. We are afraid of it for the same reasons as with monopolies.
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Are there really corporate oligopolies/monopolies?

What is the idea of the conventional criticism? In a nutshell, it holds that the classical model of atomistic (refers to less concentrations) competition is still the proper norm for organization of the business/market system. This was the case in19th century America when products were fewer and simpler, firms were smaller, markets were predominantly local, supernumerary income (surplus of disposable income over that required to buy conventional necessities) was small, product substitution was a minor factor for consumers, and few new product offerings because of slow-paced technological advancement.
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Are there really corporate oligopolies/monopolies?

What is the idea of the conventional criticism? Conventional critics assert that: ` Aggregate concentration in the economy has been rising. ` Concentration in many individual markets is high. ` Economies of scale do not require giant firms and existing high levels of concentration for maximum efficiency. ` Excessive market concentration has given corporate managers discretionary power to fix prices, products, and outputs. (Monopoly/Oligopoly) ` Monopoly power has produced inefficiencies (allocation of resources; try to look at it from a macro perspective), high prices, inflated profits, and a loss in public welfare.

Are there really corporate oligopolies/monopolies?

What could have caused the perceived problem? Embedded in the American mindset is the innate desire and predilection for freedom (equality and choice for this matter), hence, the mistrust on concentrated power in social institutions. Our (author of reference) political faith is in democracy and a government of separated parts, each checking and balancing the other. We believe that no organization should be able to dominate others. Hence the growth of large institutions has always been viewed with apprehension, if not hostility.
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What does the conventional criticism suggest of public policy?

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Simply, conventional criticism suggests that the government should enact policies that will break up big companies and ban mergers to prevent concentration which is deemed harmful to society. (Fragmentation)

What is the dynamic perspective to corporations and competitions?

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The perspective starts from the premise that changes in business structure are results of business population dynamics, i.e. changes in business entry, exit, and growth rates, in which mergers play but a minor explanatory role. It asserts that:
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The market is expanding contrary to the conventional view of a static market; Competition is rising rather than stagnant; Merger bans and corporation breakups are not in the public interest.

What does the dynamic perspective suggest of public policy?

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Public policy should focus on preventing specific acts of anticompetitive behavior by businesses, and on opening up of all kinds of markets to new competition.

Lets take a look at the issues and break the deadlocks between the conventional and dynamic views on corporate economic power and public welfare.

Which is true on the death of competition?

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Conventional: Corporate planning has replaced the market and consumers are subject to only what highly concentrated corporations offer. Dynamic: Competition is still effective which is contrary to the conventional idea that concentration is killing competition.You must factor in international competition (how non-American conglomerates can get the best out of American ones in public biddings) and the continuing intra-industry (inside the industry) and potential competition borne from highly advanced technologies which caused easy diversification for largescale companies. This is exactly the reason why companies invest a lot on R&D and market research.

Which is true on the death of competition?

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Conventional: Small business will die out because of concentration, killing competition. Dynamic: If that were true, we should find a decline in number of business formations and a rise in business failures.Yet the Dept. of Commerce index of new business formations stood at its all-time high in 1968, the very year in which corporate mergers reached their peak number (240,000). The trend has been like this: young entrepreneurs build businesses, make it successful, sell it to large corporations for capital gains, and repeat the process. Rather than making businesses die out, concentration actually induced business formations.

Which is true on the death of competition?

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Conventional:What about the automobile and cigarette industries which seem to greatly limit competition? Dynamic:The big corporation should be seen as the result of high entry barriers that are indigenous/native to such industries, not as the cause of those barriers. Try to think of the cost of the capital and risks. General Motors grew in an effort to realize the potential economies that were inherent in advancing technologies and changing markets.

Which is true on maximum efficiency and high prices?

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Conventional: A spread out market of small-sized companies can also attain maximum efficiency. It does not need economies of scale. Dynamic: We need to talk about vertical and horizontal integration in coming up of products. Such integration especially in the context of supply chain management decreases the cost on time and financial resource in coming up with a finished product. Factoring in the prevailing competition, lesser production costs results to lower prices.

Conclusion
` The over-arching question: In line with Corporate Social Responsibility, should these corporations willingly fragment themselves by virtue of public policy, i.e. restrictions to further increases in total economic value of the corporations? `

This conclusion serves as the answer: The current degree of concentration of business in large corporations is consistent with effective competition. It adds significantly to the welfare of the American people. Corporations, therefore, in the lens of CSR should continue with what they think is best in terms of efficiency for their products to give the best of what they can give to the consumers. Adequate returns on resources employed is a form of CSR after all. However, they should do this while considering the external environment, e.g. ecological considerations. In the lens of CSR, the government should simply enact antimonopoly policies that are PROVEN to be harmful to the general public. It also needs to consider lessening entry barriers since enlarged markets/concentrations are not actually bad, but beneficial.

Moral Lesson: Conventional critics, please do not rely too much on outdated concepts which are obviously not representative of contemporary society. Also, do not try to win the hearts of the American people by simply fueling up their innate apprehension (see slide 10) on ideas which may, on the first look, seem to be dangerous and against the principle of equity and freedom.You will look bad when they finally realize that they have been had just because of their ignorance or misconcenption of some economic and corporate management concepts. End of Report