Sociology 110 Professor Aldrich & Ms. Davis

October 1st1998, Summary

Five Merger Waves since 1887 helped produce an economy in which very large organizations dominate many industries. The waves were:

  1. 1887 to 1904 Massive horizontal integration, huge fortunes made. Rockefeller, for example, was more rich than Bill Gates.

    Anti-trust laws, WWI slowed mergers

  2. 1916 to 1929 Vertical integration and some diversification. Auto companies wanted to own the chair of production, ownership in more than one industry (steel, iron, and ships).

    3. Depression, WWII slowed mergers

  3. 1947 to1979 Conglomerates. Different industries, minimize risks. Hard to regulate.
  4. 1980 to1990 Horizontal and diversification and divestiture- buying out companies, breaking them up, and selling the pieces. Relaxed regulation associated with Reagan.
  5. 1994 to 1998 Horizontal integration, divestitures, and diversification.

 

Big firms are usually the result of mergers. They grow by buying other businesses.

There is a fear in society of "Bigness". People fear big government, big industry, big media, etc.

Concentration Ratio

Can be measured at two levels: 4-firm and 8-firm

  1. List all of the companies in an industry. Rank them according to sales.
  2. Total sales of an industry equals 100%.
  3. Calculate how much the top four or the top 8 sell.
  4. Used for policy decisions.

 

The domestic auto industry is very concentrated. The top four firms account for 99% of the total sales of the industry. The top 8 firms account for 100%.

 

The cement industry is less concentrated. The top four firms account for only 29 % of the total sales in that industry. The top eight account for 49%.

 

Centralization

The top 100 manufacturing firms had 55% of all corporate assets in that industry. The level of centralization has not changed much over time while the level of concentration has increased over time. Why?

 

How are mergers possible?

Access to capital is needed for a merger.

Banks used to be very important for accessing capital.

Banks are less important now because firms raise funds through stocks, bonds, and their own credit card companies, for example. These types of fund-raising methods are more difficult to regulate.

 

Regulation

Politicians react to concentration trends.

Historical movements to act against concentration: The Truman Act, etc.

Government tries to limit the freedom of movement of big firms to make them "socially useful".

The United States is much less regulated than other countries.

Regulation has been growing since the 1800s but is still small.

In Europe for example, most of the railways are government-owned.

 

Debate the question "Resolved: That large corporations threaten the economic and political health of the United States and should therefore be more closely regulated and/or broken up into smaller units."

Pro: Break up big businesses

Con: Keep big businesses as they are

Consumers are best served by competition: low prices, innovation (better products).

-In many industries, innovations are small and inexpensive, so firms do not need to be big to innovate

Need big firms for innovation to pay for high research and development costs.

Big businesses give money to special interest groups to sway policy. They have a disproportionate influence on public policy, which is non-democratic. The money is used in exchange for votes. They essentially make the rules.

Small firms do not have left over capital to invest back into the community at all. They need to put all of their extra capital into their own business. Therefore, we need big firms to fund philanthropic activities.

The money that big businesses give to parties makes politicians more concerned about the interests of the corporations than the interests of the constituents.

The money that big businesses give to political parties does not sway politics because businesses contribute to both parties, which maintains a balance of power.

Many companies do not have a unionized workforce.

Big businesses often have unions that keep big businesses in check. The workers can unionize.

Big businesses often downsize, putting thousands of people out of work. Big business equals big failure.

Small businesses are more likely to go out of business completely. Big businesses are more stable.

Unethical business practices: big businesses exploit small firms and suppress innovation, which hurts consumers. Small firms cannot get ahead.

Small business owners make money when they are bought out. Small firms can still have a chance to make it big: Gateway, Microsoft.

 

 

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