Blood Bank Merger: By Erin Sullivan
"Orlando blood bank may merge with 2 others"bloodbank2.jpg

Summary of article:

Last November the Orlando Sentinel published an article describing a possible merger of the three largest blood banks in the state, Florida’s Blood Centers (FBC) of Orlando, Community Blood Centers (CBC) of Lauderhill, and Florida Blood Service of St. Petersburg. The consolidated companies would bring in an annual income of $300 million, as well as have access to eighty percent of Florida’s population. As with most mergers, some employees will be let go but FBC’s chief executive officer Mike Pratt assures that they will “manage that process through attrition as much as possible”. The article goes on to describe past issues FBC had with its previous CEO Anne Chinoda who resigned due to media pressure after she received a large raise a month and a half before firing forty-two employees in addition to other accusations of dubious business practices. These problems explain the reduction of donors and financial concerns the Orlando blood bank has encountered as of late, making the merger very appealing to FBC. Rick Walsh, FBC chairman, promises that blood prices will not skyrocket even though “the banks would be forming a near monopoly”. Now, a pint of whole blood in Orlando and South Florida/Tampa Bay cost $200 and $185 respectively. Together the three banks collect a million pints of blood each year. The article assures readers “All three have vowed to hold prices steady and say their chances of doing that would be enhanced by the merger because their larger size could give them greater purchasing power and operating efficiencies”. If the merger takes place the number of blood banks in Florida will drop from eight to six. Also, the merger will end the battle between Florida’s Blood Centers and Community Blood Centers, which fight for donors in South Florida and Orange County. In order to do so, the companies utilize their additional funds for donor incentives and extra employees.

Economic Analysis:
Mergers are controlled by the federal government because of the fear that merging will give an organization too much market power, or the ability of a firm to charge a price greater than marginal cost. Once the companies have more market power (unless the market is perfectly competitive, all firms have some market power, meaning there is a loss of efficiency in the market for almost every good) they can use it to raise prices and lower output. In the case of blood banks this can be especially harmful since the product is used to save lives. Surgery is impossible without blood and trauma cases often require blood transfusions, as well. If price goes up beyond what consumers (hospitals, for example) are willing to or able to pay, less blood will get to those that need it and patients will suffer. Also, there is already a shortage of blood, so a reduction of output will make
matters even worse.

The merger of these three blood banks will be horizontal, a merger between firms in the same industry, as opposed to vertical, which is a merger between firms at different stages of production of a good. The federal government tends to be more concerned about mergers that are horizontal because of the aforementioned increase of market power. The government has trouble making decisions regarding horizontal mergers because of two factors. It can be difficult decide what the exact market is for a product, which can decide whether or not the government opposes the merger. If the market is broad, merging two companies will not increase market power enough to affect the price and output of the product, so opposing the merger would not be reasonable. If the market is narrow, a merger will most likely result in an increase of market power so great that they will most definitely be against the merger. This is the case for the blood bank. With only eight banks in Florida at the moment, consolidating Florida’s Blood Centers, Community Blood Centers, and Florida Blood Service, reducing the number to six, will make the newly-merged organization substantially more powerful. This threatens the price and output equilibrium for blood.
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On the other hand, merging two companies horizontally can increase economic efficiency. It is made clear in the article that consolidating the three banks will increase annual income greatly, as well as increase contact with donors. This possibly means new donors, leading to more pints of blood and more lives saved. There is a paradox here, best described in Hubbard and O’Brien’s Microeconomics: “Although the newly merged firm has a great deal of market power, because it is more efficient, consumers are better off and economic efficiency is improved” (Hubbard, p. 479). This paradox can make it difficult for the government to decide whether or not to put a stop to a merger.

Another important factor that should be considered is the effect the merger would have on competition. Competition benefits consumers in the sense that in order for organizations to compete against and outperform each other, they must appeal to consumers and adopt practices that benefit them. The rivalry between FBC and CBC described in the article made the two organizations work hard to attract donors. Without this driving force, the new company may become lax in its attempts to draw in new donors, a habit that can harm the hospitals, surgical centers, and dialysis units that need the blood.

Not to be ignored is the effect the merger would have on employment. Jobs are lost due to mergers and this one would be no exception. Phlebotomists (the technicians that collect the blood donations) and the technicians that test the blood could possibly retain their jobs if the merger results in increases in donations, locations and therefore output, but on the administrative side of the company, people will need to be let go in order to avoid the duplication of responsibilities. However, if the new monopoly decreases output, as their greater market power would allow them to; those that handle the product directly could take a hit, as well.

In light of the economic implications of this merger, it is up to the government to decide whether the risk outweighs the reward. If the consolidated company can in fact be more efficient and give more blood to those that require it, then the government need not oppose it. However, the merger could harm consumers by making the blood too expensive or reducing the amount available. In this case, the repercussions would be too great to risk.

Critical Thinking Questions:

  1. What sector of the government decides whether a merger should be opposed? Also, what criteria are used to make the decision? The Department of Justice and the Federal Trade Commission set the merger are the ones that scrutinize large mergers. They also set the guidelines that help firms understand if a merger will be opposed by the government. There are three parts to the guidelines: market definition, measure of concentration, and merger standards (Hubbard, p. 479). Market definition involves identifying all of the firms making products that consumers consider close substitutes. If there are close substitutes, an increase in the price will lead to a loss of revenue when consumers switch to the competitor (Hubbard, p. 479). The concentration of a market is determined using the Herfindahl-Hirschman Index (HHI) of concentration. It squares the market shares of each firm in the industry and adds up the values of the squares (Hubbard, p. 480). Merger standards are developed using the concentration index mentioned above. If the HHI is less than 1,000 the mergers are not opposed because the market is not concentrated. If the HHI is between 1,000 and 1,800 the markets are somewhat concentrated and the merger might be challenged. A post-merger HHI greater than 1,800 will most likely be challenged by the government because the market is very concentrated (Hubbard, p. 480).
  2. Is it possible for the market for blood banks to become perfectly competitive? What are the possible barriers to entry? The market can most likely not become perfectly competitive because the number of producers will not increase enough for that to occur. As shown in the article, the number of blood banks in Florida has reduced over the years, rather than grown. As more banks merge, the market becomes closer to a monopoly than a perfect competition. A possible barrier to entry could be government imposed. The government requires a license to open a blood bank and there are certain qualifications one must have in order to be employed at one.
  3. How do externalities factor into the decision to merge the blood banks? An externality is a benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service. It should be considered whether or not merging the banks would increase the social benefit, or the total benefit from consuming a good or service (equal to the private benefit plus any external benefit), compared to the social cost of having less blood banks in the state (Hubbard, p. 134). If the new organization becomes more efficient due to lower costs and access to more of the state then more people in the general population will be benefited, not just those that receive transfusions. Their families, friends, employers, employees, etc. will be better off. Also, their improved health means they can continue contributing to the economy. On the other hand, having two less blood banks could have a negative effect on society at large. If it indeed becomes a monopoly, prices could rise, output could fall, and those besides the patient could pay a steep social cost. If a person dies because they could not afford a blood transfusion, those that depend on them would suffer. Also, whoever they benefit with their job or product would be worse off.




Works Cited:

Hubbard, R. Glenn, and O’Brien, Anthony Patrick. Microeconomics. 3rd ed. Boston: Prentice Hall, 2010. Print.

Tracy, Dan. "Orlando blood bank may mergewith 2 others." Orlando Sentinel 18 November 2010: Web. 15 Apr 2011. <http://articles.orlandosentinel.com/2010-11-18/health/os-blood-banks-merger-20101118_1_orlando-attorney-leighton-yates-anne-chinoda-blood-bank/2>.




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No matter what happens on the business side of things, it's still imperative that those who are eligible donate blood! Save up to three lives and give today.