September 6, 2011
Washington's Antitrust Timewarp—A Commentary by George L. Priest
The following commentary was published in The Wall Street Journal on September 6, 2011.
Washington's Antitrust Timewarp
By George L. Priest
The Obama administration's suit to block AT&T's acquisition of T-Mobile will harm, not help, our sputtering economy. The administration claims the acquisition "would result in tens of millions of consumers . . . facing higher prices, fewer choices and lower quality products for mobile wireless services." It argues that stopping the buyout "will help protect jobs in the economy" since mergers usually reduce jobs through the elimination of redundancies.
The first of these claims has no factual basis—indeed, the market believes otherwise. The second is indefensible as social policy.
It is very difficult at an abstract level to know what the effects of a merger or acquisition will be on competition within an industry. Firms may merge to create market power and increase prices, though they may also merge to create efficiencies that lower prices.
The Justice Department presumes that the acquisition of T-Mobile (the fourth largest wireless provider) by AT&T (the second largest) will lead to "higher prices . . . and lower quality products" based on the high market share that would result. But market share is a very rough proxy for market power and essentially meaningless in a network industry.
There are strong reasons to predict that AT&T's acquisition will lower prices and improve product quality. First, there's lots of competition in the wireless market. Prices have been declining progressively over time. There are many local market competitors with discount and pre-paid plans. There is clearly an economic reason that T-Mobile's parent, Deutsche Telekom, has no further interest in the American wireless market. If there were great profits to be made because of lack of competition, Deutsche Telekom wouldn't be selling T-Mobile.
Second, the best evidence of the prospective effect of a proposed acquisition is the response of competitors that will face the combined firms. The chief competitor, Sprint, the third largest wireless company, has been lobbying to stop the merger from its first announcement.
If the acquisition would lead to increased prices and lower quality products as the Justice Department has claimed, Sprint would be better off after the acquisition. Sprint would be able to add subscribers, not lose them, because of AT&T's higher prices and lower quality. Sprint would oppose the acquisition—as it has—only if it thought that the merger would put it in a worse position by increasing the competitive pressures that it already faces.
The market—though not the Obama administration—understands this point. On the day that the Justice Department announced its opposition to the acquisition, Sprint's share price rose 5.9%, reflecting investors' belief that Sprint will be in a better competitive position without the acquisition.
The Obama administration's emphasis on job maintenance is even more confused. The administration has argued that the acquisition should be opposed because mergers reduce employment by eliminating redundant jobs. But a sound economy is not built on redundant jobs. An economy becomes stronger as redundant jobs are eliminated, costs and prices reduced, and the effective wealth of the nation enhanced. A major reason that the Obama administration's efforts to stimulate the economy have failed is that it has consistently poured money into negative-value investments.
Much of the Justice Department's failing on this issue derives from its failure to understand that network industries must be evaluated differently from more traditional, manufacturing industries. The market share guidelines upon which the Justice Department relies to oppose this acquisition may make sense in the context of manufacturing industries. But they make no sense in the context of networks in which there are great benefits from large networks with large market shares.
This was the mistake the Justice Department made in the Microsoft case almost a decade ago. It wanted to break up Microsoft, supposedly to create greater competition among Web browsers. The courts prevented the effort, and to good effect.
The rise of Google, Facebook and the competition from smartphones that resemble computers have shown that the focus then on browser competition misunderstood the rapidly changing nature of network competition. The Obama administration is making the same mistake with its opposition to AT&T's acquisition of T-Mobile.
Mr. Priest teaches law and economics at Yale Law School.