The Great Merger Movement was a predominantly U.S. business phenomenon that happened from 1895to 1905. During this time, small firms with little market share consolidated with similar firms to form large,powerful institutions that dominated their markets. It is estimated that more than 1,800 of these firmsdisappeared into consolidations, many of which acquired substantial shares of the markets in which theyoperated. The vehicle used were so-calledtrusts. In 1900 the value of firms acquired in mergers was 20%of GDP. In 1990 the value was only 3% and from 1998–2000 it was around 10–11% of GDP. Companiessuch asDuPont,US Steel, andGeneral Electricthat merged during the Great Merger Movement wereable to keep their dominance in their respective sectors through 1929, and in some cases today, due togrowing technological advances of their products,patents,andbrand recognitionby their customers.There were also other companies that held the greatest market share in 1905 but at the same time did nothave the competitive advantages of the companies likeDuPontandGeneral Electric.These companiessuch asInternational Paper and American Chiclesaw their market share decrease significantly by 1929as smaller competitors joined forces with each other and provided much more competition. Thecompanies that merged were mass producers of homogeneous goods that could exploit the efficiencies of large volume production. In addition, many of these mergers were capital-intensive. Due to high fixedcosts, when demand fell, these newly-merged companies had an incentive to maintain output and reduceprices. However more often than not mergers were "quick mergers". These "quick mergers" involvedmergers of companies with unrelated technology and different management. As a result, the efficiencygains associated with mergers were not present. The new and bigger company would actually face higher costs than competitors because of these technological and managerial differences. Thus, the mergerswere not done to see large efficiency gains, they were in fact done because that was the trend at the time.Companies which had specificfine products, like fine writing paper, earned their profits on high marginrather than volume and took no part in Great Merger Movement.
One of the major short run factors that sparked The Great Merger Movement was the desire to keepprices high. However, high prices attracted the entry of new firms into the industry who sought to take apiece of the total product. With many firms in a market, supply of the product remains high. A major catalyst behind the Great Merger Movement was thePanic of 1893,which led to a major declinein demand for many homogeneous goods. For producers of homogeneous goods, when demand falls,these producers have more of an incentive to maintain output and cut prices, in order to spread out thehigh fixed costs these producers faced (i.e. lowering cost per unit) and the desire to exploit efficiencies of maximum volume production. However, during the Panic of 1893, the fall in demand led to a steep fall inprices.
Another economic model proposed by Naomi R. Lamoreaux for explaining the steep price falls is to viewthe involved firms acting asmonopoliesin their respective markets. As quasi-monopolists, firms setquantity where marginal cost equals marginal revenue and price where this quantity intersects demand.When thePanic of 1893hit, demand fell and along with demand, the firm’s marginal revenue fell as well.Given high fixed costs, the new price was below average total cost, resulting in a loss. However, alsobeing in a high fixed costs industry, these costs can be spread out through greater production (i.e. Higher quantity produced). To return to the quasi-monopoly model, in order for a firm to earn profit, firms wouldsteal part of another firm’s market share by dropping their price slightly and producing to the point wherehigher quantity and lower price exceeded their average total cost. As other firms joined this practice,prices began falling everywhere and a price war ensued.
One strategy to keep prices high and to maintain profitability was for producers of the same good tocollude with each other and form associations, also known ascartels.These cartels were thus able toraise prices right away, sometimes more than doubling prices. However, these prices set by cartels onlyprovided a short-term solution because cartel members would cheat on each other by setting a lower price than the price set by the cartel. Also, the high price set by the cartel would encourage new firms toenter the industry and offer competitive pricing, causing prices to fall once again. As a result, these cartelsdid not succeed in maintaining high prices for a period of no more than a few years. The most viablesolution to this problem was for firms to merge, throughhorizontal integration, with other top firms in themarket in order to control a large market share and thus successfully set a higher price.
In the long run, due to desire to keep costs low, it was advantageous for firms to merge and reduce their transportation costs thus producing and transporting from one location rather than various sites of different companies as in the past. Low transport costs, coupled with economies of scale also increasedfirm size by two- to fourfold during the second half of the nineteenth century. In addition, technologicalchanges prior to the merger movement within companies increased the efficient size of plants with capitalintensive assembly lines allowing for economies of scale. Thus improved technology and transportationwere forerunners to the Great Merger Movement. In part due to competitors as mentioned above, and inpart due to the government, however, many of these initially successful mergers were eventuallydismantled. The U.S. government passed theSherman Actin 1890, setting rules againstprice fixingandmonopolies. Starting in the 1890s with such cases as Addyston Pipe and Steel Company v. UnitedStates,the courts attacked large companies for strategizing with others or within their own companies tomaximize profits. Price fixing with competitors created a greater incentive for companies to unite andmerge under one name so that they were not competitors anymore and technically not price fixing.[