Industry consolidation is when smaller and more fragmented companies are being acquired by larger companies in the same industry. This often becomes a self reinforcing trend. As more and more small companies are acquired, there will be fewer and fewer left, leading to a scarcity effect where demand continues to rise as the supply of targets decreases.
Industry consolidation can be motivated for by a variety of reasons, including:
Achieving economies of scale: Large companies can benefit from economies of scale, such as lower costs of production, distribution, and marketing, which can give them a competitive advantage over smaller firms. By merging with or acquiring other companies, firms can increase their scale and reduce their costs.
Increasing market power: Consolidation can lead to larger companies with more market power, allowing them to dominate the market and potentially raise prices or limit competition.
Expanding into new markets or product lines: Mergers and acquisitions can help companies expand into new geographic markets or product lines that they may not have been able to enter on their own.
Improving profitability: By eliminating duplication of resources and reducing costs, consolidation can help companies improve their profitability and financial performance..