T-Mobile, Sprint Merger: The Good, The Bad, and The Ugligopoly
What could possibly be bad or ugly about a $26.5 billion merger between the numbers 3 and 4 in wireless service provision in the US that places the new firm at number 2 in a three-fold dominance of the industry that includes Verizon and AT&T?
First things first, why the merger? From the merging firms come the standard refrain or should I say, mantra: "Better competition, lower costs, greater investment spending on jobs and leading technology (think 5G speeds)". Economic Nirvana!
We have heard this before. I will just be selective and pick a very familiar industry, the Airline industry. From a monopolistically competitive market dominated by 9 firms in the early 2000s, to an oligopoly market, with dominance by 4 by 2013, following a string of mergers and acquisitions, the arguments were “better competition”, “better customer service”, “more routes” etc. It’s 2018, did these arguments materialize as promised?
Well, answering this question does not particularly fall under the purview of what is good, so allow me to sidestep the question briefly. More generally, so long as we are not dealing with the creation of a monopoly from a merger there is the theoretical sense in which we should have competition, especially if what existed prior was more or less that of struggle and survival for one or both of the firms that did go on to merge. However survival does also mean that either costs are lowered or prices are higher or both following the merger, in order for the new entity to maintain financial solvency, which was the raison d'être for the merger to begin with.
The T-Mobile and Sprint merger suggests similar, not because these two firms are not profitable but because they appear to be a distant third and fourth when compared to Verizon and AT&T and so the argument is that to compete more effectively, especially in the investments needed to implement 5G speeds and to stave off competition from the Cable industry, they need to reduce that distance, and the merger provides this. “Can you hear me now”? Good!
I think though that this is strictly an argument on paper or should I say an argument based on the usual refrain from the merger proponents. Of course the additional sweeteners here are the spurious notions that such mergers create more jobs, especially by taking better advantage of the corporate tax reform, and they allow us stay ahead of China in the global wireless speeds technology race etc.
I say spurious because talk is cheap. I fail to see the mechanisms in which a merger that creates job duplication creates more jobs. The tax reform policy on its own should still have created more jobs if the two firms do not go ahead with the merger and to invoke a greater ability to take advantage of this through the merger is simply a red herring in the argument. And of course stoking the fear of China continues to be a winner in today's political climate, but I am getting ahead of myself...
Yes, from the preceding discussion, the merger should lead to job losses, just as the airline mergers led to reduction in flights because of the existence of route duplications that result.
Whatever investments are promised and predicated on the development of newer technologies, and which should be job creating, would not necessarily lead to additional jobs, but perhaps at the most, a replacement of jobs that would have been lost. However it is important to note that technological innovations do not necessarily lead to more jobs but to fewer especially in an industry where such innovations build on existing ones in incremental fashion. If they did not build on existing ones, there would still be a dearth of employees with relevant skills by design as the technology by definition is cutting edge.
To go back to our comparison industry, airline fares move about and often reflect other things like energy prices and changes in consumer demand. As a result it is not clear what has happened to prices on average. In some years since the mergers and over some period of time, they have looked higher, while at other times, they have appeared to be lower or stayed the same. Credible reports though do show that profits have increased significantly while at the same time prices have gone up, flights have become more cramped, additional fees have been introduced, and there have been the reduction in number of flights in key cities like Cleveland, Pittsburg, and St. Louis.
We should expect the analog of this with the wireless carriers merger. Higher prices and a reduction in the quality of customer service perhaps in the form of longer wait times, more automation etc. These are speculative but they are expected to positively correlate with attempts to reduce all forms of duplication with no resulting real loss in the form of customers migrating to other competitors.
When you have a Fortune news report from 2016 suggesting that there were documents DOJ staff had showing airline executives bragging about how the mergers allowed them to jack up prices for travelers, why should we expect any different from a similar situation. Reduced competition does lead to higher prices. The executives need not get careless in flagrant bragging, but they know what eliminating competition allows them to do.
The ugly is simply one word - a more entrenched oligopoly industry or an Ugligopoly (not a real word, unless widespread future adoption credits me with being the creator). The industry which was previously an oligopoly becomes a more entrenched one, one that is ugly in the sense that consumers now have reduced variety or options. Tacit collusion is now all the more likely rather than genuine competition.
The reason for this is because the firms do not need to bother about competing anymore, market share is large enough that their profits from operating at that capacity are maximal compared to a situation where they incur additional costs from aggressively competing and trying to increase market share. The firms can now very easily raise prices and chuck it up to minuscule or even significant technological improvements and customers have nowhere else to turn to.
Oligopolies are more difficult to regulate because there is no clear case of antitrust violations as would hold with a monopoly or a firm that is too big it resembles a monopoly or is believed to be acting as one.
It is a failure of regulation to allow firms to become too big such that the prevailing argument for mergers is to allow some other firms also become as big in order to compete effectively.
In economic theory a basis for allowing a firm become big is the presence of economies of scale. However such does not suggest that the pricing decision by the firms are best for society especially if there is the absence of real competition that results. Such scale economies may lead to lower prices when there is still some degree of competition as would obtain with a monopolistically competitive industry, but perhaps not so with an oligopoly industry.
As a result, to the extent that competition may become greatly diminished, as I have surmised, then price based regulation of the industry would be justified if the merger is allowed to proceed. However what I think is best is that the proposed merger be blocked for the aforementioned reasons, and in fact that proactive steps be taken by the regulatory authorities in looking into and possibly breaking up the dominant hold Verizon and AT&T have on the market, to foster true, innovation spurring, competition.