What is industry consolidation and why does it happen?

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..