Foundation

As I’ve previously covered, the Department of Justice is suing AT&T, claiming its planned merger with T-Mobile USA harms competition in America. My retort has been market reactions to the lawsuit suggest it is the lawsuit that is anti-competitive, benefiting the existing national 4G duopoly: Sprint Nextel and Verizon Wireless.

That Sprint Nextel is jumping in with its own lawsuit now ends all doubt: the AT&T/T-Mobile deal would increase competition, benefiting buyers of high speed wireless service, to the detriment of the current duopoly which would be faced with tougher competition.

Unfortunately, the definitions of various economic terms tend to vary with the person answering the question. But I feel confident in say that regardless of what we call a given market – whether it’s an oligopoly, monopoly, or whatever else – the reason we have competition laws is that competitive markets increase theoretical efficiency, share the wealth created in the market, and keep prices down while increasing volumes sold. That’s because the less competition there is, the more that sellers will diminish efficiency by raising prices, lowering volumes sold, and capturing more of the wealth in the transactions that would be accumulated by the buyers.

Note that AT&T will not be a national monopoly if merged with T-Mobile. Maybe it might be a local monopoly in a few obscure markets serving few people, where Verizon and Sprint maybe aren’t serving there but T-Mobile and AT&T happen to be there, but to set national policy based on a tiny minority of markets is effectively a government reduction of efficiency and transfer of wealth from the majority to that tiny minority. The Obama administration and Sprint Nextel just might try it, though, if nobody puts a stop to it.

Notice also what happens if this market is, in theory, an oligopoly of price setters, rather than competitive price takers. Under this theory, where the merged AT&T/T-Mobile no longer must listen to the market and can set prices as desired… so too will Sprint Nextel/Clearwire and Verizon be able to set such high prices. If investors and Sprint Nextel’s own leadership believed this would happen, the AT&T/T-Mobile merger would be a windfall of profit for Sprint Nextel. As Wikipedia says about oligopolies, “Oligopolies can retain long run abnormal profits. High barriers of entry prevent sideline firms from entering market to capture excess profits.” A less competitive market would set up Sprint Nextel to receive some of those “excess profits.” Great news, eh?

As it turns out though, the behavior both of Sprint Nextel investors, and the company’s leadership themselves, don’t reflect a belief that AT&T/T-Mobile’s merger would create an oligopoly situation, where the three oligopolists would set prices and take higher margins. No, when the DoJ’s lawsuit was announced, Sprint’s and Clearwire’s stocks surged. And on top of that, Sprint fired a separate Sherman Act lawsuit. These are not the behaviors of a firm that stands to become a member of a rule of three oligopolist, ready to cash in at the expense of the public.

No, actually, the behaviors of Sprint and its share price are just what we’d expect if the merger, as I’ve said all along, would increase competition, lowering margins, and putting pressure on the weaker competitor. This isn’t surprising to those who have actually studied the market, as America’s wireless market is the most cutthroat in the world. Our wireless firms take in by far the least revenue per minute billed of the entire OECD. That is, our wireless firms are being pushed to set prices closer to the marginal costs, reducing profit, just like we expect to see in a highly competitive market.

Some point out that at the very high end, 4G Internet is pretty expensive. That’s true. Firstly, it’s new, with fewer subscribers, raising marginal costs. Secondly, the government is preventing competition! That’s right. AT&T is trying to use T-Mobile’s spectrum to do a proper national 4G rollout, but the government is blocking it. LightSquared is trying to get permission to start a national 4G rollout, but the government is blocking it. Two firms stand ready to double the competition, but the Obama administration is in the way.

This is why I question the relationship between Sprint/Clearwire and the White House, why I oppose any government intervention against the merger, and why I’m trying to rally the troops on this. This is important. This is the future of high speed Internet, the future of jobs and economic growth, and government is entirely in the way. Eric Holder and Julius Genachowski are from the government, and they’re here to help, just like Ronald Reagan feared.