In 2015, worldwide mergers and acquisitions added up to a record $4.28 trillion worth of deals. These mega-mergers, such as the Dow and DuPont $130 billion deal and the recent $66 billion deal between Bayer and Monsanto, are prominent examples of companies consolidating within their industries. Economists today are asking themselves whether these mergers and concentrated sectors are to be revered or feared.

Big businesses strive to become even bigger and more dominant within their sectors. Multiple industries have seen a large increase in mergers and acquisitions since 1990. In 1990, there were 11,500 deals. In 2008, that number has risen to 30,000. Although the image of a booming Silicon Valley makes start-ups feel ubiquitous in America, the rate of new businesses formation has actually been declining for the past three decades. Since 1986, the United States workforce has seen a 53 percent increase in employment by the 100 biggest businesses according to The Economist. Americans and people around the world are feeling the increased effects of large corporations.

There are many reasons why companies merge together. For one, companies that merge can produce more goods at a cheaper price and thus achieve economies of scale. Steel industry mergers in the early 20th century were often motivated by this reason.

Another reason is innovation. After a merger, the resulting company’s increased profits could be used to design new goods and services that smaller companies may not have enough capital to achieve.

A company may also buy out another company to eliminate its competition, diversify its products for different industries or to increase its supply. Overall, companies want to get bigger, increase their power in the market and achieve record profits year after year.

However, what are the reasons behind the increase in mergers? One main factor has been low-interest rates for the past ten years. The low rates make it easier to borrow money and buy out other companies. Also, after the 2008 financial crisis, businesses have been wary of reinvesting excess returns. As a result, there have been huge cash reservoirs left unused by companies. These reservoirs are then used to buy out companies through mergers and acquisitions. Since the demand for goods and services in the global economy has been depressed, businesses are motivated to grow their profits through mergers rather than organic growth.

The United States has seen this massive shift towards large companies ruling industries. The proportion of United States GDP generated by the largest 100 companies rose from 33 percent in 1994 to 46 percent in 2013. The Economist referred to this trend as a “concentrated version of capitalism.”

Many problems arise when few companies control the majority of an industry. Aside from the other reasons why companies merge and expand their cash flows, such as economies of scale and globalizing their products, merging companies also seek more conniving perks. Consolidation may lead to more lobbying power which could then lead to the creation of financial regulations that suit the company.

Companies also merge in order to take advantage of tax cuts. This was evident in the attempted $160 billion merger between Pfizer and Allergan. The CEO of Pfizer proclaimed the deal was to combine both pharmaceuticals companies for more researching power. Months later, the Obama administration passed new corporate tax inversions laws. The deal was soon abandoned, which made it clear that the real motivation to merge was to move Pfizer’s headquarters to Ireland for the 12.5 percent tax rate, compared to their previous 35 percent US tax rate.

One aspect that economists are wary of is the effect ever-expanding businesses have on competition. Competition within the economy is one of the most vital forces that keeps innovation, productivity and growth in tune. Uncompetitive markets can result in sluggish productivity trends and higher prices for consumers.

The United States is undergoing a shift from competitive markets to consolidated ones. The 1980s deregulation enacted by the Reagan administration was intended to bring competition to untapped industries, like telecommunications. This created increased competition that is now disappearing as big businesses begin to focus more on consolidating and morphing into larger corporations.

As companies grow, extend their lobbying power and increase their profits, they shift their focus to creating a more defensive outlook towards competitors. Small companies that rival large businesses have an extremely hard time competing. In theory, if a company is enjoying high profits, rival companies compete by creating cheaper or better products so that the profits settle back to normal levels. America has not seen many such examples of competitive advantage in this decade. Firms in 2003 that had 15 percent or more in profits still had an 83 percent chance of being profitable ten years later in 2013.

Although merging and growing companies are feared by some, large corporations should also be celebrated. Big companies have the resources to mass produce electric cars at affordable prices. Google may be one of the largest corporations in the world with enormous power within its industry, but the company is responsible for its unbelievable search engines that almost everyone with the internet uses every day. Without the massive size of some businesses, people may have never used or imagined the goods and services available in the economy.

The trend towards large, consolidated companies has been increasing in the United States. Businesses taking advantage of deregulation and easier credit create highly concentrated industries that pose both benefits and disadvantages for consumers. Whether the benefits outweigh the disadvantages remains to be seen.

Nearly two years since AstraZeneca shafted Pfizer’s $104-billion courtship offer, Pfizer and Allergan announced on Nov. 23, 2015 that they were going to merge with a $160-billion mega-deal – the largest deal in the pharmaceutical industry’s history. After the deal is finalized in later 2016, the new Pfizer Plc will be the largest drug-maker on the planet, surpassing Swiss multinational Novartis, French pharmaceutical giant Sanofi, and former American rivals Merck & Co. and Johnson & Johnson in projected revenue. The magnitude of this deal has not only raised questions about the synergistic aspects between the two firms, but has also drawn major attention to the motives of the deal.

The synergistic aspects of the merger can only be speculated on in the context of size. Pfizer Plc will receive an enhanced and valuable revenue channel through Allergan’s flagship drugs that treat depression, dry eyes and skin as well as Pfizer’s blockbuster drug Lipitor, used to treat high levels of cholesterol and Viagra, for erectile dysfunction. Aside from revenue, Pfizer Plc’s operating cash flow is estimated to be $25-billion, while the next largest pharmaceutical firm, Novartis, has a $14.66-billion operating cash flow. Pfizer Plc is incomparably large, and given its orientation regarding product diversification, revenue and cash, the size of the firm itself can be major aid in overcoming synergistic hiccups, such as redundant streamline processes, managerial and upside biases, and brand and identity crises, that it will face in its pursuits in a much larger pharmaceutical landscape.

Aside from the synergy speculations, the motives of the merger are quite interesting, especially in the context of the domestic pharmaceutical industry and its future. According to an article on NPR, Pfizer CEO Ian Read says that the merger would “create a leading global pharmaceutical company with the strength to research, discover and deliver more medicines and therapies to more people around the world”. However, the deal itself is structured in a way that allows Allergan to purchase Pfizer, allowing Pfizer to re-establish its headquarters from its original location in New York to Ireland, where Allergan is situated. The reason for this inversion is that it allows Pfizer to enjoy a lower corporate tax rate in Ireland at around 17 percent to 18 percent as opposed to the U.S. effective tax rate at 25 percent. According to an article on The New Yorker, Read offers the justification that the merger would put Pfizer “on a more competitive footing within [their] industry” in reference to the fact that other competitors such as Novartis and Astrazeneca, headquartered in Switzerland and England respectively, enjoy lower tax rates.  But there is generally little evidence to support the idea that Pfizer needs this higher footing. Pfizer, headquartered in the United States, can make use of the technical expertise and abundant capital, as well as receive federal support for research ventures, as shown in its collaboration with the National Institutes of Health. And in fact, Pfizer has generated around $11.4-billion in net income only last year. Thus, the merger seems to be a product of clever financial engineering and the employment of cost cutting decisions suggesting its motive is financial.

In terms of the pharmaceutical industry and its future, there seems to be a clear divide between the firms that focus on the research and development (R&D) required to create blockbuster drugs, and which firms focus on marketing and the sales of these drugs. Historically, most firms competed in the pharmaceutical industry through R&D and attempting to obtain patent approval for their drugs. After a firm created a novel drug and obtained patent approval, the firms would enjoy ample profits due to strong demand for the new drug and the valuable patent protection. Upon patent expiration, the relevant market would be flooded with generics, and prices would be driven down. The same firm would then continue to R&D new drugs, and this cyclic industry behavior would be continued. In the last couple of decades, the discovery and creation of blockbuster drugs has slowed down. Thus, larger firms have focused on cost-cutting measures, leading to the R&D divide of recent. Now, large pharmaceutical firms and small pharmaceutical firms are distinct when R&D as a metric is examined. Smaller pharmaceutical firms are now doing most of the innovation required in developing new blockbuster drugs and larger pharmaceutical firms are coming in at the later stages of the drug production pipeline, perhaps integrating these smaller firms into themselves and using advantage of their distribution channels and abilities in dealing with regulations to generate revenue.

This general trend is evidenced in merger history in the pharmaceutical industry in the last decade. For one, Pfizer and Warner-Lambert merged in 2000, motivated by the ease in which Pfizer could bring Warner-Lambert’s drug Lipitor into markets. In addition, Pfizer and Pharmacia merged in 2003, mainly for control of Pharmacia’s anti-inflammatory drug Celecoxib. While both Warner-Lambert and Pharmacia were relatively large firms, the principle or key reason behind these mergers was for the acquisition of blockbuster drugs by the larger firm from the smaller firm for the purposes of marketing and distribution. In the same vein, the American biotechnology company Gilead paid $11-billion for Pharmasset and its antiviral drugs in 2012, and Merck & Co. purchased Idenix, another biopharmaceutical firm, for its Hepatitis treatments in 2014 for $3.9-billion. Both were smaller purchases than those of Pfizer in the last decade, shedding more light on the big pharma small pharma divide on which firms do the innovation in the industry.

So, what the Pfizer- Allergan merger means for the industry is an extension and magnification of the trend that has been occurring for the past couple of years, bringing it to a larger scale. In fact, the Pfizer and Allergan deal can be viewed in light of this trend in itself, as Pfizer’s purchase of Allergan could be labeled as a purchase of growth. This is given the fact that Pfizer’s revenue decreased by five percent each year for the last five years and Allergan’s increase in revenues by roughly 40 percent year over year. According to an article on the Economist, Nils Behnke, a partner of Bain & Company, states that large pharmaceutical companies got around 70 percent of revenues from drugs that were not developed in-house, showing the extent to which large companies, in a sense, rely on smaller firms to do the innovation for them, a reliance that is so inherent that the merging behavior and motives are not very likely to change.

This stagnation is concerning from the consumer point of view, especially given the fact that there is unflagging demand for drugs of all kinds. Large pharmaceutical firms seem to sustain themselves through acquiring small firms that innovate, rather than sitting down and innovating for themselves, even though they have sufficient financial capital do so. Therefore, the powerhouses of the industry are leaving the job of innovation to the smaller firms, which have much less resources and financial capital to do so, putting into question not only the quality of drugs being produced, but also the starved innovative potential. This concern is only ameliorated within limits by the profit incentive of scientists and smaller firms in creating innovative drugs to solve problems and be bought-out in a lucrative acquisition.

It will be interesting to see how these already large pharmaceutical firms will become, and what it will mean for R&D as this industry trend progresses. The new Pfizer Plc has already announced plans to split itself into two, one company would focus on selling generic drugs, and the other would revolutionize and create, suggesting that perhaps there is a limit to how large a pharmaceutical company can become while properly managing itself. But given the discussed industry trend, the effective, marginal innovative power of a ridiculously large firm versus a large firm’s is not substantial.

Drugs play a critical role in our daily lives – they can be used to reduce pain, regulate bodily processes, and even mitigate metastasizing of cancer. Since pharmaceutical drugs are essential to the health of American citizens, the public reacts sensitively when a price of a lifesaving drug goes up. When the price of a lifesaving drug goes up by a marginal amount, consumers will usually swallow the additional cost. But when the price goes up significantly, many might push for reform rather than passively accept the change. An instance of this happened recently when the price of a drug increased by more than 5000 percent within the span of 24 hours.

In September, price gouging in the pharmaceutical industry was brought to public attention when Martin Shkreli, the CEO of Turing Pharmaceuticals, raised the per-pill price of his newly-acquired product, Daraprim, from $13.50 to $750 overnight. Daraprim had been on the market for 62 years and was a very widely used drug for curing toxoplasmosis, a common parasitic infection.

This exorbitant price increase is known as price gouging, a market phenomenon and concern that involves firms jacking up the prices of their product by rates that are considered unfair. Price gouging is considered unfair when the new high prices make them financially inaccessible to masses. And yet, price gouging is not regulated in the pharmaceutical industry.

This price hike caused a huge public and social media backlash, with people denouncing Shkreli as a “thief”, “brat’’, or “criminal”. Shkreli, however, claimed to the Los Angeles that he wasn’t going to put “this money in [his] pocket and use it to pay [himself] a dividend,” but rather invest it in research aimed at eliminating toxoplasmosis. Many medical professionals, though, have doubted his rationale as it’s widely accepted that Daraprim is effective already with little to no side effects according to Dr. Carlos del Rio of Emory University. Eventually, Shkreli’s damaging actions, drew the attention of powerful figures and organizations. Democratic presidential candidate Hillary Clinton promised to personally look into reforming the drug market. The Infectious Diseases Society of America and the HIV Medicine Association claimed that this price gouging was unjustifiable, and the encapsulating Pharmaceutical Research and Manufacturers of America disavowed Shkreli as a member.

Shkreli’s price gouging is particularly revealing of the dilemma that price gouging in the pharmaceutical markets presents and how difficult it is to find a resolution to this dilemma. This dilemma and resulting difficulty can be underscored through three key ideas:

One, the ubiquity of price gouging makes preventative measures difficult.

Most major pharmaceutical and biotechnology groups have attempted to paint Shkreli’s decision as an anomaly. In truth, though, price hiking is commonplace among pharmaceutical companies. Drugs that are more life saving and far more consequential than Daraprim have had their prices increased gradually over time to avoid media backlash.

According to Alliance Bernstein, a global asset management firm, the Canadian drug company Valeant increased the prices of their two heart-related drugs, Cuprimine and Isuprel by more than 2000 percent over the past two years. Similarly, Wolters Kluwer’s PriceRx database, a database of drug prices information, reflects that the prices of the Pfizer’s drugs have gone up by 115.9 percent since 2013. And the well known Gilead Sciences, the research based biotechnology company, charges $84,000 per treatment for its widely sought out hepatitis C drug treatment, according to the Centers for Medicare and Medicaid Services.

These examples show that price hikes are not a rare phenomenon in the pharmaceutical market. It is a practice that is more pervasive than what is evident, and therefore these examples only detail a small aspect of the price gouging and unfair market practices that pharmaceutical companies employ. So while encompassing groups such as PhRMA attempt to portray Shkreli’s actions as uncommon, in reality, Shkreli is actually emblematic of a widespread practice, and an even larger issue in the industry.

Two, the pharmaceutical market structure facilitates price gouging.

The pharmaceutical market is imperfect with evidence of monopolistic competition in specific drug categories. Drug manufacturers produce differentiated products and can have complete market share within a therapeutic segment rather easily due to the variety of diseases encompassed under the pharmaceutical umbrella. Consequently, many drugs are not substitutes of one another, and many do not have substitutes at all. Because of this, firms can remain immune to the price changes of other drugs, essentially eliminating producer competition altogether.

What needs to be considered in conjunction with a firm’s external price immunity is the inelastic demand for certain drugs. Some people need certain drugs to live and function. These drugs are absolute necessities for these people, and in many cases, because of the market structure, these drugs have no substitutes. Thus, the pharmaceutical companies that produce these drugs can jack up the price of their drugs because they have a consumer base that has a strongly inelastic demand for these drugs, guaranteeing that sales will not wane over time.

Three, price gouging is hard to resolve from the producer side as potential solutions are hard to implement.

One way to potentially resolve this situation is to introduce competition. While this seems theoretically simple, as any firm could offer a cheaper substitute to Daraprim and push Turing out of the market, it’s not exactly feasible in practice. Drug producers looking to create substitutes might be turned off while looking at the profitability in markets that are small and dictated by a single, established firm. In addition, the patent process takes too long for firms to join in on the market. Patents for new drugs to compete with monopolistic ones like Daraprim would take an average of a little under 3 years to be approved, and because the market that the drug would compete in would probably have changed within that time, entrepreneurs are not willing to make that investment. Therefore, Shkreli’s production of Daraprim is a monopoly in its market that is created by not only market forces, but also protocols and regulations.

One possible way to combat high prices in the pharmaceutical market is by demanding transparency in pharmaceutical firms and government regulation. But government regulation in itself can be tricky to implement in that it can be too in favor of the consumer. Imposing policy that lowers drug prices may in the short run make drugs more affordable to the consumer, but it can also dramatically stifle the revenue of the pertinent pharmaceutical firms. This can lead to the loss of innovation and incentives for improvement of drugs in the long run.

Ultimately, society must decide if life-saving drugs should be more affordable for those who desperately need. However, this will have to be considered with the trade-off of creating an efficiency loss and drastically cutting the revenues of pharmaceutical companies that will put that revenue to use in research and development in the pipeline for new drugs.

Pharmaceutical giants have flirted with biotechnology firms over the years, but only recently has there been serious talk of marriage. Since the 80’s and 90’s, these two kinds of drug producers have tried everything from joint licensing deals to extensive alliances. However, the two industries have maintained their independence. Both tacitly acknowledged inherent differences in their business models and cultures, and therefore avoided complete mergers.

That is, until their recent union. In 2007, an estimated $60 billion in biotech acquisitions by pharmaceutical companies occurred in the U.S. alone. The most talked- about example is Swiss pharmaceuticals company Roche and its $44 billion offer for California- based Genentech, the largest biotech firm in the world. Other major deals of late include Bristol-Myers Squibb’s bid for ImClone, AstraZeneca’s purchase of MedImmune, and Takeda’s acquisition of Millennium. The purchases are surprising given the recent recession and investment slump. So what spurred this sudden upsurge in mergers?

The most apparent driving force appears to be the pending wave of expirations on patents pharmaceutical companies have traditionally relied on. Starting with the Hatch-Waxman Act of 1984, the Food and Drug Administration (FDA) has granted exclusive marketing rights to brand name drugs for specified periods of time. Comparable generic drugs could typically enter the market after ten to fourteen years, causing prices to drop by about eighty percent. This government-granted monopoly has been both a blessing and a curse for the pharmaceutical industry: while they raked in billions from drug patents, easy profits have largely stifled any desire to innovate.

In buying up biotech innovators, pharmaceutical companies hope to fill their emptying pipelines with products less susceptible to imitation. Unlike most pills, biotechnology drugs often consist of complex proteins. Generics have difficulty replicating such products, giving pharmaceutical companies time to boost their sales while competition plays catch up. Furthermore, since biotech products are relatively new, FDA regulations pertaining to their patents are less clear. So even if generics successfully copy biotech drugs, regulatory barriers can make getting the drugs to the market arduous and expensive.

Still, it seems risky for pharmaceuticals to put high stakes on large biotech players when smaller firms are much cheaper to absorb. One possible explanation is heavier regulatory oversight on the part of the FDA. Recent safety scandals involving brands like Merck’s Vioxx and GlaxoSmithKline’s Avandia shook regulators, making them wary of sanctioning new inventions. Even if start-ups have good ideas, the FDA will likely regard them with suspicion and therefore complicate their profit prospects. Established biotech firms, on the other hand, have approved drug lines. Pharmaceutical businesses are hence willing to shell out more for partnerships with greater guarantees of return.

Some pharmaceutical companies also view the recession as an advantageous time to buy. Investors remain pessimistic about the industry’s lack of innovation and potential government price-controls on drugs. Acquisitions could therefore revitalize innovation and boost investor confidence. The weak dollar has also made U.S. firms prone to foreign takeovers, as the recent European courtship of Californian and Massachusetts biotech firms attests to.

Moreover, drug companies are working on a product that would treat colon cancer, which has been rumored to exceed original expectations. If on-going trials confirm this report, then the drug would be worth significantly more than its current valuation. Roche might therefore want to get its hands on Genentech before final test results come out. Big pharmaceuticals prove that while they struggle in coming up with actual merchandise, they recognize a sweet sale when they see one.

Despite the persistence of their pharmaceutical suitors, biotech firms remain uncertain about reciprocal affections. Ernst & Young’s 2011 report shows that biotech firms now face more competition for financing and have less means to push drug trials into later stages of development. Plus, in the wake of the credit crunch, venture capitalists that largely sponsored biotech firms are now actively searching for exit routes in the form of buyouts.

Financial hardships appear to have driven many reluctant biotech firms into the arms of pharmaceutical giants. Large biotech powers like Genentech and ImClone initially held out on offers before grudgingly caving in. Although playing hard to get could just be a bargaining strategy to fetch higher sale prices, cultural differences between the two industries are undeniable. Scientists are worried that extensive drug bureaucracies, themselves unable to innovate, will drag down their creative biotech industry. Many Genentech employees are uneasy about the acquisition, uncertain about how reorganizations in company structure will affect their ability to work.

However hesitant they may be, many biotech firms have accepted big pharmaceuticals’ proposal, signaling the birth of a new recombinant company. These acquisitions could potentially benefit both partners: a boost in innovation for pharmaceuticals and ample research funding for biotech. But thus far, it is hard to tell whether this whirlwind romance will end in bitter squabbling or matrimonial bliss.