David R. Henderson  

AT&T/T-Mobile Merger is Pro-Consumer

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The share prices of AT&T and T-Mobile parent Deutsche Telekom AG fell sharply, while shares of No. 3 cellphone company Sprint Nextel Corp., seen as the biggest loser if the proposed merger goes through, were up nearly 6%.
This is from Thomas Catan and Spencer E. Ante, "U.S. Sues to Stop AT&T Deal," Wall Street Journal, September 1, 2011.

In that one short paragraph is powerful evidence that the merger the U.S. government is blocking would be pro-competitive and pro-consumer.

The evidence: share prices of one of their competitors, Sprint Nextel, rose on the news that the merger would be blocked. Imagine you're Sprint Nextel. Your market value rises when the merger is blocked. Why would that be? Because you're better off without the merger. But if the merger really were anti-competitive, it would cause prices to rise. If prices rose, then the merger would help Sprint Nextel and blocking the merger would hurt Sprint Nextel. If Sharis Pozen, the acting antitrust chief, really cared about consumers, she would let the merger sail through.

I made the same point in "Sirius Business," Wall Street Journal, February 28, 2007.


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COMMENTS (16 to date)
David Clayton writes:

Broaden your scope a bit: VZ fell at the same time T and DT were falling, as you say it should if the merger would really be anticompetitive. There must be something more here than you're portraying, otherwise VZ would have bounced the same as Sprint Nextel.

I think the market saw Sprint's market position as very weak, and that it's better able to compete against two mammoth competitors and one smaller one than it would be able to compete against just two behemoths. Perhaps more importantly, the chance of Sprint being a takeover target probably just increased.

Neither of these dynamics affect VZ the price movement of which is fatally contradictory to your argument: just as you say, if the merger would have been anticompetitive, VZ is damaged if the merger is stopped -- and its stock fell, just as you said it would.

Jim Rose writes:

david,
why be so tentative?

an antitrust complaint from market rivals is decisive evidence that a merger is pro-consumer.

joshua writes:

Can someone explain this a little more detailed? Because I'm not understanding it but I really want to... This is what I know: I thought the government was concerned with anti-competitiveness because there's a fear that the anti-competetitive organization will drive the others out of business and then hold a monopoly where they can jack up prices or whatever. I've read that such fears are often unfounded because if the prices get jacked up other businesses can just reenter the market, and that true monopolies are rare because businesses also face competition from other verticals or horizontals that the government might not think of (the NFL vs. the NBA vs. going to see a movie or whatever)

This is what I don't know: if the A/TM merger is anti-competitive, doesn't that mean it would increase the chance of Sprint going out of business? So wouldn't Sprint be hurt by it? By definition, wouldn't any competitor of AT&T be hurt by an anti-competitive move?

I guess what I'm asking is, are we saying that mergers in general are not anti-competitive? Or if not, what makes this merger different from an anti-competitive merger, and how can we tell this difference by the reaction to Sprint's stock, because It seems like Sprint would be hurt by the merger whether it's "anti-competitive" or not. Thanks...

Komori writes:

I'm not sure you can really judge whether or not it's anti-competitive based on these stock prices. AT&T going up on news of the merger while their competitors stock goes down on the same news could just mean that the stock market expects AT&T's monopoly power to suck more profits away from the rest of the oligopoly (since they'll be better placed to be King Rent-Seeker). Doesn't mean prices will go down, just that AT&T is expected to capture a larger share of it.

And, of course, with the merger blocked, their competitors get a better chance to keep their share of the rent-seeking, so their stock prices go up.

Bob Murphy writes:

David, sorry but I think I have to agree with your critics here. Obviously you and I agree that the Justice Dept. is hurting consumers; I'm just saying I don't think we can conclude as much from the stock movements.

After all (and I'm just repeating the above critics' point) why couldn't a fan of the move look at the drop in AT&T's share price and say, "Aha! The market thought AT&T was going to be able to jack up prices after the merger, but now they can't. So the blocking of the merger has kept down prices for consumers." ?

MattyP writes:

I don't buy your argument.

Firstly, assuming that the merger would not be subject ATT/TMobile to diseconomies of scale, the economies of scale involved in the merger would lower ATT/TMobile's operating costs (all of those additional service towers would ease the congestion of ATT's network), leaving Sprint at a relative competitive disadvantage, which would cause their share price to fall if the merger goes forward and rise if the merger is blocked.

Also, lower prices in the short term (and the resulting "defeat" of higher-cost competitors) can lead to more market centralization and higher prices in the long term.

As for an argument for why there would be economies of scale: ATT gaining access to Tmobile's towers would ease the congestion of ATT's networks without ATT needing to make the capital investments required to increase their bandwidth.

il falcone writes:

Stock prices may or may not be good indicators of the DoJs decision, but a quote from Sprint probably is:

Sprint (S, Fortune 500) and many of the smaller carriers have argued that the merger will harm competition and raise prices for consumers, because it would eliminate T-Mobile, the last low-cost carrier with a national footprint.
"By filing suit to block AT&T's proposed takeover of T-Mobile, the DOJ has put consumers' interests first," Vonya McCann, Sprint's senior vice president of government affairs, said in a written statement.

The lady doth protest too much, methinks.

Ted writes:

I really dislike the game of taking one data point on a stock movement and arguing that it implies something about some recently acquired news. Yes, stocks react to news. But, with the exception of very large movements in the stock's value, a temporary movement in the stock's value tells you almost nothing. For example, right now, I just pulled up real-time data on Sprint stock's and as of right now it's down 4.95%. What am I suppose to interpret that as meaning? Trying to parse out whether the anti-trust measure is good or bad is going to require a lot more evidence that just a small temporary 6% movement in the stock price of Sprint, which, as of writing this comment, has largely already been lost in the market. If this was a permanent 6% gain in Sprint's value, we might be able to have an intelligent conversation. But the fact the stock has already moved down nearly 5% leads me to think that 6% bump probably means nothing.

I don't particularly want the justice department to infer with this merger (I would like anti-trust laws abolitied - but I do worry about the consequences of completely eliminated anti-trust interventions, while still leaving the government entry barriers and interventions that cause us to be concerned about monopoly in the first place), but I don't think the stock price of Sprint tells you much of anything.

Hasdrubal writes:

il falcone: Just because Sprint can be seen as gaining by blocking the merger doesn't mean that everything they say is incorrect.

T-Mobile really is the low cost competitor:

“According to Consumer Reports, ‘T-Mobile plans typically cost $15 to $50 per month less than comparable plans from AT&T.” Removal of such a maverick price competitor from such a highly concentrated market – a competitor that disciplines price increases from all three other national cell phone competitors, not only At&T – raises a substantial likelihood that prices will rise following this merger.”

- http://cheaptalk.org/2011/08/28/should-the-att-and-t-mobile-merger-be-allowed-to-go-through/

http://truthonthemarket.com/ has a lot of really good commentary on the merger. They side with David Henderson that Sprint's stock prices are probably indicative of the merger being procompetitive, but the evidence is far from conclusive. For example, Verizon and PCS stock prices dropped on the news of the suit, possibly indicating other things going on.

kthomas writes:

[Comment removed pending confirmation of email address and for crude language. Email the webmaster@econlib.org to request restoring your comment privileges. A valid email address is required to post comments on EconLog and EconTalk.--Econlib Ed.]

John Donnelly writes:

Share prices as indicators of a pro-competitve and pro-consumer merger..... Seems like a huge leap..

il falcone writes:

Hasdrubal,

Sprint should be happy to see the disappearance of low-cost provider T-Mobile as it gets gobbled up by AT&T, unless of course Sprint is worried that AT&T might be able to incorporate T-Mobile's cheap prices into one, big, inexpensive Sprint-butt-kicking-machine. I have a feeling this is their worry.

It also doesn't follow that a 'rise in prices for consumers' will 'harm competition' (see the original quote I posted). This seems like a lot of scare tactics to get the public on their side. A rise in prices would encourage new market entrants or expansion of current investments.

On a last note, 'senior vice president of government affairs' always rubs me the wrong way. I know it's standard in large multinationals, but I can't help but picture Sprint's Vonya McCain begging the DoJ to block this behind closed doors and then publicly affirming the DoJ's independent actions.

I'm pretty happy with my T-Mobile service (ok, not great) and if the eventual AT&T prices suck, I'll vote with my feet.

dullgeek writes:

Tim Lee has some commentary saying that blocking the merger is the pro-market stance. I wonder what you think about his comments:

http://timothyblee.com/2011/06/06/monopolies-and-the-free-market/

My interpretation of what he says is that the lack of competition in the wireless market is a result of government intervention. The best solution would be, of course, to remove the government intervention. But as that's not practically possible, it's probably a bad idea to allow mergers between between two competitors in a market where new entrants are severely restricted by the government.

This argument makes sense to me. Is there something wrong with it?

Bee writes:

David

Your inference while plausible is likely false. A number of possible reasons could explain the change. For example, the competitive advantage gained by ATT was in the price. Whatbis clear is that your inference is based on more speculation than economic theory

Noah Yetter writes:

As a long-time T-Mobile customer, I expect only bad things from the merger, because AT&T flat out sucks. I give that a lot more weight than any reading of tea leav... I mean, stock prices.

A=A writes:

David,

Since when does competition increase when the number of competitors in the market declines? Is that what we're teaching kids in economics classes these days, or is that only in the Republican and libertarian economics courses?

Just how well does that argument hold-up in the face of the "Terminator 2"-like re-agglomeration of AT&T after its baby bell breakup in the early 1980s? Right - not very well, actually.

Your argument is built on the quicksand assumptions that:

1) a small price-change sample is representative of market sentiment and rational analysis

2) market price adjustments are rational. I've noticed that few who work in financial markets (rather than the tea-leaves world of economics) believe markets are always so rational (I used to believe this too). And the more quantitatively-oriented such a finance-world actor they are (e.g. quants like Nassim Taleb), the less they tend to believe it - i.e., the more one looks at actual, moment-by-moment data, the less-plausible the argument is in the short-run (even if in the long-run, it may aggregate to being sometimes true).

3) the following statement in the article is not, in fact, the bald-faced lie that it is: "AT&T and T-Mobile had argued that they didn't compete head-to-head for the same segment of the market, so their combination wouldn't reduce competition."

That statement is a complete lie. I choose between T-Mobile and AT&T because I want GSM service, which no other provider in the U.S. offers. I want GSM service because I want the freedom and flexibility to take my phone with me and use it overseas when I travel; this is not (generally, to my knowledge) possible with phones from Verizon or Sprint or others. I do not want the phone-network-provider coupling that CDMA services (like Verizon's) seem to entail.

So AT&T and T-Mobile are lying through their teeth when they make that statement. Absolutely LYING - because they each compete for me (and the people I know who have chosen for the same or similar reasons).

In the end, a Verizon vs. AT&T world leaves the market largely a duopoly, with over 80% market share between them. In what right-libertarian fantasy world do you believe that is an improvement in competition?

As a left-libertarian, I argue for keeping them separate, despite the economies-of-scale that might be had (such as 3G frequency-sharing, rather than T-Mo using 1700/2100MHz and AT&T using 1800/1900MHz, forcing phone makers to adapt to one or both sets of frequencies. If ATT & T-Mo wanted to, they could've cooperated on this, and still could, if they weren't so interested in customer lock-in).

We're not talking about Microsoft here, where leaving their monopoly in-place was (in my view) acceptable, because MSFT doesn't have the fixed infrastructure costs to lock the firm into a long-term strategy like telecom firms do. MSFT can be more-agile than that, and the markets can - and do - adapt more-fluidly there. That's why MSFT is now in at-best a holding pattern, which in tech is a slow decline (MSFT is looking increasingly like IBM in this respect), while Google and Apple pull-ahead with new, web-based and user-experience strategies that are rendering MSFT's desktop dominance irrelevant. (I know this because I am a Microsoft-oriented web developer by profession.)

We don't want another set of "too big to fail" institutions in this country; the banks are bad enough.

I don't know how anybody besides AT&T, T-Mobile, and lobbyist-funded Republicans and ideologue right-libertarian economists who want to defend the rights of corporations to do anything (even if the action contradicts said libertarian's other alleged goals of competition), could see the merger as a good idea.

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