Unit 5-Individual Project 1 SUBRAMANIA JAMMALAMADAKA
BUSN310-1501B-06
AMERICAN INTERCONTINENTAL UNIVERSITY
04/22/2015
INSTRUCTOR: ERIC BAIME Unit 5-Individual Project 2 Abstract Antitrust laws were essentially created to stop businesses that got too large from blocking
competition and abusing their power. Mergers and monopolies can limit the choices offered to
consumers because smaller businesses are not usually able to compete. Although free and open
competition ensures lower prices and new and better products ,it has the potential to significantly
limit market diversity. We will look at 2 examples in the paper of how mergers and acquisitions have affected the way
in which companies do business by answering a few questions. Unit 5-Individual Project 3 Example 1 Federal antitrust enforcers are investigating whether a multinational pharmaceutical company has
attempted to minimize the impact of generic competition to one of its most profitable
prescription drugs. This anti-depressant drug is company’s best seller, with the sales last year of
$2.11 billion ,representing a 22% increase from the year before. The Federal Trade Commission (FTC) is conducting an investigation to determine whether the
company has engaged in activities to prevent generic alternatives to the prescription drug from
entering the market. Specifically, the FTC is challenging a practice among brand-name and
generic-drug manufacturers to agree to delay the introduction of the lower priced generic drugs
to the market. 1. Why would drug maker want to prevent or delay generic competition? Explain.
The drug maker would want to prevent or delay generic competition to loose on cost. If
the generic drug hits the market sooner, people would start buying the generic drug as it
would be available for much lower cost with the same composition as the original drug
maker which is expensive.Hence,drug makers have started the simple tactic for keeping
off the competition from generic brands by paying them off.
It takes an average of 8 years and $100 Million to bring a new drug into the market.
Because of such extreme costs, the manufacturer wishes to make money on that drug as
much as possible as he needs to recoup whatever costs were first put in for the research
and development of that drug. A generic competitor on the other hand, has no research
and development costs .Once the product is off the patent, the competetitor is free to
isolate the formula and recreate the drug and sell it in the market for a lower price. Unit 5-Individual Project 4 Without all the extra costs that still have to be paid out by the company and therefore
back to the shareholders.Hence.to prevent such rights, the manufacturers pay the generic
competitors to have a longer time to make profit, but more importantly get the original
invested money back from the current users of the drug.
2. What types of legal barriers to market entry exist for the generic?
When generic products enter the marketplace, they typically appeal more to some buyers
than others. For example, HMO’s and hospital pharmacies are more likely to use generic
products because they have the knowledge and expertise required to evaluate them in
contrast to individual physicians. One therefore expects that generic rivals will make
greater sales. That being so, producers of innovative products will respond to generic
competition more strongly in some market segment than in others.Hence,there are some
legal barriers to market entry exist for generic. They are:
a) Research and development(patents)
b) Costs
c) Marketing streams such as agreements with doctors, pharmaceuticals, hospitals to
promote the use of the drug and also making sure the doctor legally and properly uses
the drug.
d) Significant legal barrier.
3. What are the possible ethical dilemmas present in this example?
The possible ethical dilemmas in this example are possible issues here with trade
agreements, which are illegal under the Sherman antitrust act which prohibits certain
business activities that federal government regulators deem to anti-competitive, and
requires the federal government to investigate and pursue trusts.Also,there is an issue Unit 5-Individual Project 5 with costs, since companies are directly refusing to compete, the buyers loose out and as
such an unfair agreement has taken place of paying the competitors to keep off the
market .
Example 2
The boards of 2 major telecommunications companies recently agreed to a $16 billion-dollar
merger that would create the world’s largest telecommunications company. Although some agree
that the synergy between these companies could be dynamic, others feel consumers could
ultimately pay the price for the merger depending on which company becomes dominant in the
various service areas.
1. Why do you think consumer advocates have expressed concern over such merger
possibilities?
Mergers which are so big can result in lot of disappointments for consumers. The
consumer advocates have expressed concerns that this kind of merger will result in
decreased competition and ultimately higher prices which is a big cause of concern for
the consumers. The consumer advocates have expressed concern over such mergers
because the consolidation of the two largest telecom companies might be a big trouble for
the consumers as they would be stuck with big bills if they choose a simple phone service
abd let go a bundled package of services. With the merger of two big companies, there
will be less competition on the market ,which could force the smaller operators to pay
more for access.
2. Other than pricing, what are some pitfalls that consumers might have to deal with when 2 Unit 5-Individual Project 6 major companies merge?
Mergers happen to achieve cost savings, gain market share and become financially
stronger. The effect of mergers on consumers can be positive or negative depending on
the industry and market competition. Some of the pitfalls that consumers
might have to deal with when two companies merge are:
a) Price – By eliminating at least one competitor from the market ,a merger may allow
the remaining companies to implement coordinated price increases. For example, in
this merger of two big telecom companies , the smaller telecom companies are forced
to increase their price to be in the market. A merged entity may also pass on cost
savings to consumers through lower prices.However,if the merger results in only one
or two retailers serving the entire market ,then individual and small business
customers end up paying more.
b) Variety – Mergers can decrease or increase the choices available to consumers. For
example, in this merger of two big telecom companies can reduce the number of
phone plans ,but it may also allow the merged company to save costs and compete
with the low price data plans .
c) Service – Mergers can affect the level of customer service. For example, in this
merger of two big telecom companies, the merger may lead to lot of termination of
employees in the customer service area which can lead to a poor customer
service.However, sometimes it can lead to a better service as where one of the
company before the merger had a poor customer service but after the merger it has
been improved.
3. What are the possible ethical dilemmas present in this example?
Corporate mergers and acquisitions are undertaken with the belief that the combined Unit 5-Individual Project 7 companies will be able to grow more rapidly and be competitively stronger than they
were as independent companies. The possible ethical dilemmas present in this example
are:
a) Terminating Employees- One of the benefits of this merger is the opportunity to cut
costs by consolidating certain business functions of both the companies and reduce
the staff positions from both the companies. The harsh reality of the merger is to fire
employees.Valued, loyal employees who have contributed to the company’s success
may lose their jobs. Higher management planning the merger needs deal with the
uncomfortable moral issue of whether firing employees is the right thing to do.
b) Relocating Employees – Those employees fortunate enough to be retained after the
merger may still face the challenge of relocating, if the company plans to consolidate
the operations at one place. The families of the employees will be affected by this
change. Higher management planning the merger must be sensitive to these concerns
of the employees. References
Web source – http://talkingpointsmemo.com/
Pharmaceutical economics and policy – pg 149 -by Stuart O Schweitzer
Web source – http://www.justanswer.com/business-law
Web source – http://smallbusiness.chron.com Unit 5-Individual Project 8
