Annie Lowery on AT&T’s Acquisition of T-Mobile
Merging AT&T and T-Mobile would reduce competition further, creating a wireless behemoth with more than 125 million customers and nudging the existing oligopoly closer to a duopoly. The new company would have more customers than Verizon, and three times as many as Sprint Nextel. It would control about 42 percent of the U.S. cell-phone market.
That means higher prices, full stop.
I see no great evil in duopoly. Two nearly matched rivals could make for more fierce competition as it defines the consumer choice more clearly. When there are many choices you might go for a particular company for familarity reasons. You friend as T-mobile so you have T-mobile.
But,as AT&T and Verizon battle it out, they will continue to be sure not only to make sure you know why their plan is better but why you would be a fool to go with the competition. This forces each to compete on multiple dimensions and could end up with a better wholistic product for the consumer.
Now, all that having been said I think going with the orthodoxy of “don’t mess with markets” is a strong lesson from the field of industrial organization that is sometimes mistakenly ported over to other areas, like natural resources, public goods, or ownership rights.
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Tuesday ~ March 22nd, 2011 at 2:39 pm
Dale
“…sometimes mistakenly ported over to other areas, like natural resources, public goods…”
Public goods such as wireless spectrum?
Tuesday ~ March 22nd, 2011 at 3:43 pm
Sandrobot
I suppose it would be true that if competition in the industry is of the Bertrand type then the number of firms need not be of particular concern. But if competition is Cournot then it certainly matters greatly for consumer prices.
You could find that going from three firms to two firms dramatically changes the nature of competition. For example in a Hotelling line model there’s no pure strategy Nash Equilibrium configuration for three firms, but there is for two. So you might find that the two firms compete more intensively for the “median” consumer, at the expense of the fringes.
Also I find it mistaken to presume that comparing between just two firms need be any easier than comparing between three, the contracts offered by wireless companies are almost invariably of the bundled, price disrciminating type so just comparing between the many contracts offered by one firm can run up against information processing constraints.
I’m not sure if the government ought to block the acquisition, that raises many other questions. But insofar as whether this is undoubtedly good for consumer welfare is very uncertain to my mind.
Tuesday ~ March 22nd, 2011 at 3:52 pm
IVV
Anyone who has dealt with the Comcast-Optimum duopoly as a customer knows not to expect any competition.
Tuesday ~ March 22nd, 2011 at 4:21 pm
No Facts, No Problem? « Truth on the Market
[...] Adam Thierer at Tech Liberation Front provides some insightful analysis as to the political economy of deal approval. Karl Smith makes a similar point here. [...]
Tuesday ~ March 22nd, 2011 at 4:29 pm
ed
Dale, the wireless spectrum is not a “public good” as defined by economic theory; it is neither non-rival nor non-excludible. Google for references.
Tuesday ~ March 22nd, 2011 at 9:00 pm
No Facts, No Problem?
[...] Adam Thierer at (right here at Tech Liberation Front) provides some insightful analysis as to the political economy of deal approval. Karl Smith makes a similar point here. [...]
Tuesday ~ March 22nd, 2011 at 11:25 pm
teageegeepea
I didn’t even know Comcast had a competitor named “Optimum”!
Let me play Devil’s Advocate: ripping off the public is a public good for competitors. If there’s a large number of them, defection (competition) is hard to avoid. A smaller number of players means easier coordination.
And now some empirical evidence on the necessary number of firms. I’ve also heard the argument that the mere threat of competition from free entry can be enough.
Wednesday ~ March 23rd, 2011 at 8:41 am
IVV
You might know Optimum as Cablevision. It’s in the NYC tri-state area.
Essentially, though, the two cable providers have split their service areas so that they both have monopoly status within their area. (one neighborhood only gets Comcast, the other only gets Optimum). I could imagine that AT&T and Verizon could do something similar through phone services, either through arcane pricing or through division of allowed phone technologies.