Business Regulation of Mergers and Implications of Government Intervention - the Case of a Potential Merger for Blockbuster

When a large firm in a mature industry wants to grow a common strategy will be the seeking of an acquisition or merger. However, large firms in an industry will often be faced with government regulation which may seek to control and limit the way merger activity takes place. For example, if Blockbuster, a major film rental company, wishes to merge with another firm they may face barriers, while these barriers may be seen as good for competitive environment, they may be perceived by Blockbuster as limiting their commercial actions.

It may be argued that government regulation of needed in the markets for a number of reasons. The first may be the role of the government in protecting the market system to ensure that competition remains in a market. Where one firm seeks to merge with another giving them a large or dominant market share there are dangers that the market power may be misused. For example, where there is a single dominant firm in a market they may become a price setter rather than a price taker. Where a firm has little effective competition the usual rules of supply and demand may not apply, as consumers may have no choice but to pay the price set by the supplier. Where the product or service sold is one that is essential such as utilities, and the demand is inelastic, the firm may be able to profiteer from the consumers who cannot switch to a different supplier. Where there is active competition in the market this is good for consumers as it places a downward pressure in firms to charge competitive prices. Money spent on one items in an economy cannot be spent elsewhere...

While Blockbuster may not be an essential service, if they were the only major supplier they would be able to set a price at whatever level they choose for the demand that they wanted to supply. This may also deprive many consumers of the opportunity to make purchases if the price is too high. Therefore, a major need for regulation is the need to protect consumers.
For progress and innovation in a marketplace it has been shown that competition is necessary (Aghion et al., 2005). The relationship between competition and innovation has been shown to be bell shaped. Too little competition means firms have little or no motivation to invest in innovation, and a very high level may create pressures that restrict the potential profit that may be created by innovation and restrict its' attraction (Aghion et al., 2005). The lack of motivation seen in industries where there is no competition may be observed in former monopolies in many countries, where the industries stagnated, such utilities and telecoms industries before liberalization (Thompson, 2008). For example, if Blockbuster were the only film rental firm they may not have invested in the development of the online services; they would not have needed to. This innovation has occurred due to competitive forces, including the way technology was being used to access media both legally and illegally by consumers. Blundell (et al., 1955) found that in large firms with a high market share there would tend to be a higher level research and development for innovation, but that there was also a need for competition, with the probability level of innovation being higher in competitive industries.

Aghion (et al., 2005)…