The Economist 2014, ‘Holcim and Lafarge: Into the mixer’, The Economist, 12 April, viewed 26 April 2014, < http://www.economist.com/news/business/21600690-giant-cement-merger-seeks-transform-struggling-industry-mixer >
Lafarge decided to merge with Holcim decided to merge to create the world’s largest cement producer worth $60 billion. This merger arises the concern of the competition watchdogs in 15 countries about the sufficiency of competition and whether the merger will form an oligpoly (‘Holcim and Lafarge: Into the mixer’ 2014). In order to eliminate these competition watchdogs’ worries, Lafarge decided to sell their assets up to $7 billion to ensure there is sufficient competition in the market (Lachapelle 2014).
Application of concepts
Competition watchdogs like the European Commission are worried about the lack in competition and the creation of an oligopoly market in the cement industry (Shotter, Stothard and Hammond 2014). Lack of competition in the oligopoly market will lead to market failure due to higher price and lower output. In order to merge with Holcim, Lafarge faces the violation of economics policy, especially antitrust regulation and need to disposal its assets (Shotter, Stothard and Hammond 2014). Competition optimizes the allocation of resources and encourages better response to customer needs (Hunt and Morgan 1995). Oligopoly companies can charge price over its marginal cost, which create deadweight loss and reduce economic welfare due to the inefficient use of resources (Samuelson and Marks 2012). The government intervenes to reduce the loss in consumer welfare and reach pareto efficiency by legislate and enforce regulations such as the antitrust law which aims to enhance competition in the market and promote consumer welfare (Markham 2011). According to the antitrust law, actions like predatory pricing, forming cartels and collusion, which are strategies for oligopoly companies to drive their competitors out of the market are illegal (Markham 2011).
The merger makes Lafarge the biggest cement producer in the world, which suggests Lafarge will fare well. After the merger, Lafarge will have an estimated production capacity of 380 million tons annually (Taipei Times 2014). The cement industry is currently dominated by five companies, and if Lafarge merges with Holcim, it will further increase the high concentration ratio, and Lafarge will posses strong market power which enables Lafarge to produce at a profit maximizing quantity and raise prices higher than the ones in competitive market (Singh and Zhu 2008). Moreover, the merger increases the level of economies of scale of Lafarge, which means company can produce goods at a lower cost due to bulk buying and spreading overheads (Agostini, Saavedra and Willington 2014). The higher prices and economies of scale will give the company a supernormal profit (Posner and Landes 1980).
However Lafarge needs to divest its assets up to $7 billion, which is approximately 10% of their combined earnings in order to eliminate antitrust regulators’ worries in order to complete the merger (Lachapelle 2014). These disposal assets will be bought by Lafarge’s competitors. Therefore the capacity and market share of Lafarge’s competitors increase so as Lafarge‘s increase, which suggests Lafarge’s capacity and market share and profit will not increase as much as business expected. In addition, the disposal of assets may be viewed as force sales and Lafarge may sell assets at a lower price, which will result in a potential loss to the company (Campbell, Giglio and Pathak 2011).
However, the small sacrifice Lafarge made to please the antitrust regulator is worthwhile, because the benefit the business will get through this merger outweighs the sacrifice it made. Firstly, the disposal assets include some old and low-productivity plants (Lachapelle 2014). Sales of these plants to their competitors will incur limited deduction in Lafarge’s