Saturday, 8 October 2011

A Tax Software Merger

In "U.S. Sues to Stop H&R Block Deal for Rival,", the WSJ says:
The Department of Justice filed a civil antitrust lawsuit on Monday to stop the biggest U.S. tax preparer, H&R Block Inc. from buying the maker of a rival, do-it-yourself tax preparation product called TaxAct....
The top three companies in the field account for 90% of the sales of online tax programs and do-it-yourself tax-filing computer software.

The proposed purchase "would combine the second- and third-largest providers in that market and essentially create a duopoly," the department alleged in a complaint filed in a Washington, D.C., federal court. H&R Block had agreed to buy 2nd Story Software, or 2SS, in a transaction valued at $287.5 million in October.

TaxAct has served as "a maverick in the market," prompting its two rivals to lower prices by introducing such innovations as offering free filing of federal tax returns on the Internet in 2005, the Justice department said. The department's complaint cites internal H&R Block emails that it said show Block wanted to buy the TaxAct maker to "regain control of industry pricing and avoid further price erosion."
... The department cited an internal H&R Block email saying that "the other possible strategic consideration is that Intuit and HRB together would have 84% of the digital market and we both obviously have great incentive to keep this channel profitable."

Will blocking this merger encourage further entry into the industry?

One thing I wonder is why the US government does not itself give away or sell tax preparation software. Is there a good reason for it not to?


  1. I believe that the government is certainly justified in preventing the proposed merger of the two companies. Although I am not familiar with the specific government definition of a monopoly, duopoly, etc, an 84% market share would certainly command significant control of pricing. By allowing the proposed merger, H&R Block would be able to artificially raise the price of its services to boost profitability. This will have the effect of increasing producer surplus for H&R Block, but in return it will reduce both consumer and total surplus. By disallowing the merger, the market will remain relatively competitive (i.e. low prices), thus making entry into the market of a new player difficult because of the prospect of lower returns.

  2. The DoJ is structuring their argument without consideration for the internet/software/computer age that we now live in. Certainly 84% of total market share is frightening on the surface, but if prices for tax software remain high, the incentive for new competitors to enter the industry is also very high. Software creation costs have been drastically reduced in the last two decades and will continue to decrease, allowing small start-ups to produce competitive software and sell it through an online platform that requires minimal capital expenditures. The federal government and IRS also do not pose significant barriers to entry through regulations.

    I think it would be wise of the IRS to produce and deliver online tax services to taxpayers in this country. They could charge a minimal fee on top of total tax liability that would be paid with an individuals federal tax payment. Not only would this software not cost the IRS and federal government much money (because of their knowledge of the subject), but first-time buyers are likely to chose an IRS branded product over a H&R Block product.

    Another future development within this industry would be the current push of many lawmakers on Capitol Hill to create a simpler tax code. If deductions are completely eliminated or significantly reduced, the demand for specialized tax software would be drastically reduced.

  3. Anyone who has more than 70% should probably back off. That is not based on empirical data, rather just my opinion. There are problems with the economy, and there is good reason not to let one (or two) companies control an entire market. Of course the opposite of this is people could just learn how to do their taxes, or we could move to a flat tax.

  4. Considering that the top 3 companies control 90% of the market, we know that the industry is highly concentrated. 2 players merging together would create a monopoly effect and basically crush any and all competition. The HHI would change substantially and the government would most likely not let this merger pass. Such dominant control of the market creates higher pricing and high barriers to entry.
    H&R may try to present to the courts that it will help reduce costs, streamline processes etc, but the authorities are concerned about price rise and diminishing consumer surplus. H&R block shouldn’t expect a favorable outcome.

  5. I feel minimizing the likelihood of the formation of a duopoly in this market is for the best. As mentioned above though, the market is extremely highly concentrated, and I’m not sure how much these preventative measures will encourage new entrants to try to make it in this arena. Rather, I feel this effort is more for show and to establish faith within the consumer that the industry is not monopolized.

    The only thing I can think of that may be a reason for the government not to sell such software is that this would essentially squelch further competition in this market. However, if after looking at the numbers, it seemed the most economically efficient way to fulfill this consumer need, it would be worth looking into. However, the effect this would have on producers would also need to be heavily scrutinized and considered.

  6. It is clear that the industry is highly concentrated and it is best for the two firms to remain as such. I do not think that new entrants will be enticed to enter the market even without the merger because the industry is already very highly concentrated with a few small firms dominating the market.

    It is hard to tell why the U.S. government doesn't currently offer online tax services to citizens. If it would be profitable, it seems that they would have already implemented such a program. But since there is nothing of that nature available, I question whether or not it is actually a good idea.

  7. I agree with all the comments above. The U.S. government should stop H&R Block Inc. from buying the maker of a rival. It is obvious that there will be a duopoly in the market and both consumer surplus and total surplus will be reduced. However, I don't think that stopping H&R will make more new entrants to join the market because this market is already highly concentrated. The government should pass a law that can help new entrants to join the market if the government wants to make the market less concentrated. I also think that the government selling tax preparation software is a good idea but it must think good ideas or deals to compensate existing suppliers.

  8. Good point, Dylan--- tho the market is very concentrated, if entry is easy that wouldn't matter. One thing that might hurt entry is customer loyalty---if customers are reluctant to switch to a new entrant because they don't know if its product is good or not. I don't know how important that is with tax software.

  9. According to The 2010 Horizontal Guidelines, other things aside,the emails that revealed Block wanted to buy the TaxAct maker to "regain control of industry pricing and avoid further price erosion." would be enough to declare the merger illegal.
    I think blocking this merger will make little difference to future entry because the market is already quite concentrated and whether or not new companies can enter depends more on the entry barriers rather than current concentration. However, I believe customer loyalty would be a big problem here because for such crucial issues like paying taxes, people may care more about paying the right tax than getting the tax software at a lower price.
    As for the government,I believe the government is not justified to compete with the private sector in the first place. Besides, I doubt to what extent will the taxpayers prefer products by the government because the government of course will prefer the more tax the better, so the results one get from the government's products may not be so much to the tax payers' favor. Anyway,one cannot design a product to confront him/herself.

  10. As Jordan said, since Block admitted that their goal with the merger was to decrease competition, there is little left to be said about whether the merger is legal.

    As for Tax Software, I don't think it would be an easy market to enter. These companies have years of experience to develop products that make it easy for customers to file tax returns. They might have much better information about what customers want so that the filing process is easy.

  11. This would definitely lower competition and stop new companies from entering the market. H&R would gain cost cutting innovations and control even more of the market. Barriers to entry would be too high for someone else to justify entering.

  12. I think the numbers speak for themselves. This market is already extremely small, and on the verge of becoming a duopoly. The problem for a market such as tax preparation is the extremely high barrier to entry that presents itself in the form of reputation. Taxes are a difficult and important task for people, and they need to trust the reputation of whoever is preparing those documents. In my opinion this is a big part of why the government doesn't get involved in tax preparation software. People want a non biased third party to decide how much they owe.

    Furthermore, it does seem that TaxAct has made money saving innovations that have hurt HRB in the past. IF HRB bought TaxAct they would have very little incentives to continue pioneering online tax filling solutions because it would simply run down the cost of their main face-to-face tax consulting operation.

  13. Even after the DOJ stops the merger from happening, I doubt that this is an invatation to new entrants to go ahead and enter this market. Although the merging did not go through, the industry is still highly concentrated on these already stable firms. Especially when the product/service they are supplying is one that is a need for these customers and the customers, in order to maximize accuracy of using the tax software, it helps for them to trust what they're using.

  14. The overwhelming market share gained by this merger makes it impossible for this merger to pass. It would entail a complete takeover of the market leaving small industries to suffer.
    The government probably doesn't offer these services as they may not receive a strong enough following or do not have enough resources to provide an online filing solution. Though the entry of the government as a player in the market may help reduce market concentration, it may not be a profitable option for them

  15. I do not think that blocking this merger will stop new entrants into the industry. A good reason for the US government not to give out software like this is because we have so much debt, the government doesn't need to create another function.