Much has been written — much of it in alarm — about the observed increase in market concentration at the economy-wide level over the past 30 years. The evidence for this is uncontroversial: From 1997 to 2014, concentration increased in 75% of industries in the United States. It isn’t a big leap from there to conclude that this trend is reducing competition and increasing markups —the difference between the selling price of products and their cost.
During the same period, there was an important growth in international mergers and acquisitions (M&A). The M&A process consists of two companies joining their businesses to form a new enterprise, allowing them to enter new markets, expand their product range, face less competition, and win greater market share. The main concern with regard to this is that the acquiring company has the ability and incentive to increase prices relative to cost. For example, when Diageo, a multinational corporation with popular spirits brands like Johnnie Walker — a global giant—, acquired Yeni Raki, the most popular spirits brand in Turkey — a local star —, Diageo’s share of the Turkish spirit market increased to 63%. The combination of this global brand with the local Yeni Raki motivates the company to elevate and harmonize markups for both brands.
Home brands have a huge advantage over foreign ones (home bias), raising demand by an amount equivalent to imposing a 55–60% tax on competitors from abroad. The home bias helps us understand the phenomenon of local stars. Even if they lack universal appeal (which explains why they rarely sell in other markets), local brands often achieve large shares in their home markets. This makes it difficult for foreign firms to penetrate those markets without purchasing local stars.
A Global Examination of Mergers and Acquisitions
This dynamic informs a recent paper in which my co-authors and I study the effects of mergers and acquisitions, in 76 countries. We look at two major industries, beer and spirits, measuring the effect that the change in ownership due to cross-border M&A has on the performance of a brand, measured by its appeal and cost. . Our results suggest that the identity of the owner matters very little to brand performance; however, the distance between the market where the brand is offered, and the headquarters of its owner turns out to be important. Indeed, switching owners from a local to a foreign company with a remote headquarters tends to immediately impose an increase in cost or a decline in appeal on the acquired brand equivalent to a 10–15% tariff for beer, and 20%–30% for spirits. This raises the question of why firms find it profitable to collect or amalgamate brands. The obvious explanation coming from recent critiques emphasizing rising market power is that mergers suppress competition between brands.
In response to multinational brand amalgamation, governments have had to make decisions as to whether to compel divestitures of some of the acquired brands in order to prevent concentration from rising too much, while, at the same time, minimizing the efficiency losses that can occur from divestiture. Our results suggest that in the U.S. and E.U., the government’s authority to force acquiring firms to divest brands in markets where they consider the mergers to have anti-competitive effects, led to significant consumer savings, with prices 4-7% lower than they would have been without the interventions.
The Problem With Not Enforcing Competition
By contrast, in countries where the authorities were more passive and allowed mergers without divestitures, consumers ended up paying up to 30% more than what they would have if the pro-competition policies of the U.S. and E.U had been adopted. The greatest potential savings for consumers were found in Colombia, Ecuador, and Peru, where our study reveals that the consumer price increase of 20–30% could have been avoided with a less passive response by authorities entrusted with regulating competition.
Policymakers should take note: Divestiture policies related to mergers reduce market power and lead to consumer savings by reducing consumer prices significantly. Policies that approve acquisitions without any intervention often result in losses of consumer welfare.
The lessons drawn from the study on beer and spirits merger are, of course, not exclusive. They can be applied to other sectors as diverse as dog food, eyeglasses, and chocolate bars, which exhibit similar patterns of multinational brand amalgamation.
A Final Note on Changes in Brand Ownership and Consumer Welfare
Multinationals have used market power and efficiency as reasons to justify mergers and acquisitions. This is particularly evident in industries such as electronics, software, and pharmaceuticals, where research and development play a significant role in facilitating innovations. But, as our study shows, there are many other areas where M&As can be harmful to consumers, especially when foreign firms owning giant brands on the global stage acquire domestic companies with local stars’ brands in their portfolios.