If competing enterprises combine and integrate effectively into a corporate portfolio, external competition decreases. Buyers probably do not benefit from the lower prices that could result if internal scale and scope economies are achieved. So is there a public interest argument for legislation that mandates price reductions achieved via acquisitive diversifications? Discuss the merits of this claim.

Question

What will be an ideal response?

Answer 1

Business executives generally react instinctively against the prospect of regulation because they
perceive that it inhibits their freedom to manage. They have a point. Back in chapter 1 we observed
that rarely do they relish competition, indeed that a prime goal of strategic management is to
eliminate competitors or marginalise their impact. Subject to compliance with the legally-binding
regulations and codes of practice on takovers and mergers, integration is considered a legitimate way
to integrate and by implication reduce competition. Why should costly, hard-won efficiencies be
passed on to customers if they can go to owners, employees or retained for reinvestment? From a
wider perspective, though, additional value should accrue to customers too, in order to compensate
for reduction in their choice and bargaining power. There is surely a balance to be struck, efficient
market forces being the preferred mechanism. However, it is not always true that acquisitions result
in competition-reducing policies. For example, whilst the various marques in the Volkswagen Group
share many efficiencies in design and manufacturing, each brand is encouraged to compete with its
stable-mates. VW competes with Audi at the prestige end of the car market, and with SEAT and
Skoda in the more basis segments of the market. The evidence suggests that in recent years VW
Group has sustained, indeed increased overall output volume without profitability being unduly
constrained. Of course, a judgment must be made if such competition seems in danger of becoming
dysfunctional to Group interests.