AT&T/T-Mobile: Will consumer intuition prove correct?

September 2, 2011

By Eleanor M. Fox
The opinions expressed are her own.

Just as I was bracing for the headline, “U.S. approves AT&T’s acquisition of its fiercest competitor subject to a few conditions,” I had a happy surprise. “U.S. Files Lawsuit to Block Merger of Phone Rivals.” In another era, this would not have been a surprise. The surprise would have been that AT&T would have had the audacity to propose a merger with T-Mobile and confidently predict that it will close (betting a 6 billion dollar break-up fee that it will). After all, US antitrust law prohibits mergers where “the effect … may be substantially to lessen competition.”

AT&T accounts for about 32 percent of the wireless mobile service market, Verizon has 34 percent, and T-Mobile nearly 12 percent. The only other possibly significant national player is Sprint Nextel, whose survival is unassured.  Thus, the merger would create the nation’s largest wireless carrier and in the post-merger world the top two would have more than 75 percent and possibly more than 90 percent of the market in the near future.   Immediately after the merger, in more than half of the Cellular Market Areas (areas used by the FCC to license mobile wireless services), AT&T-Mobile would occupy more than 50 percent.

T-Mobile is a maverick. According to the DOJ complaint, “T-Mobile has positioned itself as the value option for wireless services, focusing on aggressive pricing, value, leadership, and innovation.” T-Mobile viewed itself as “the No. 1 value challenger of the established big guys in the market.” It designed a “disruptive” rate plan. It provided the first Android handset, Blackberry wireless e-mail, national hot spot access, and a nation-wide network based on advanced 4G technology. AT&T innovated in response to T-Mobile’s “threat.”

How could this not be a merger whose “effect … may be substantially to lessen competition”?

The question would have answered itself some years ago, before antitrust became a technologically specialized field and the law became undergirded by presumptions that markets work, businesses act efficiently, and firms’ incentives almost always align with the best interests of consumers.

The shift in the law was not all bad. Beginning in the 1980s, antitrust gained a strong appreciation of the pro-consumer qualities of many business acts, and “antitrust” (anthropomorphically) began to listen carefully to the stories of putative monopolists and large merging firms to try to understand:

1) whether the market, although highly concentrated, was in fact competitive;  and

2) whether the story of efficiencies was stronger than the story of harm from lost competition.

In the AT&T matter, for example, AT&T claims that wireless competition is robust and occurs principally on the local level; that T-Mobile has had financial difficulties and is not the feisty firm the DOJ paints, and that, by acquiring T-Mobile, and only by doing so, AT&T would get the extra network capabilities that it needs to roll out the next generation of high-speed service.

The Department of Justice listened to these stories and found them unconvincing. The DOJ will listen again as it prepares its case and amasses yet more data.

In the last 48 hours the media have reported consumer intuitions that this merger is seriously anticompetitive. A dynamic force for competition will be removed. Prices will go up and innovation will go down.  In last quarter century, however, we have been taught not to trust our intuitions; merger analysis is very complex, we are told; the fact of high market shares and few competitors tells us almost nothing; proper analysis involves long, hard work by the experts – especially the economists.

Economists will do the long, hard work. At the end of it all, probabilities are, some experts will predict that prices will go up and some will predict that prices will go down (and some of the expert analyses will be more authentic and trustworthy than others).  An independent federal judge will decide.

Meanwhile, don’t discount the consumers’ intuitions. They may be right.

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