The Proposed Merger of AT&T and T-Mobile: Economies as an Antitrust Defense Applied

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NES 20th Anniversary Conference, Dec 13-16, 2012
The Proposed Merger of AT&T and T-Mobil: Economies as an Antitrust Defense Applied (based on the article presented by Russell Pittman at the NES 20th Anniversary Conference).
Authors: Russell Pittman, Yan Li

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The Proposed Merger of AT&T and T-Mobile: Economies as an Antitrust Defense Applied

  1. 1. The Proposed Merger of AT&T and T-Mobile:Economies as an Antitrust Defense Applied Russell Pittman (paper co-authored with Yan Li) NES 20th Anniversary Conference 15 December 2012 The views expressed are not purported to reflect the views of the U.S. Department of Justice.
  2. 2. The “Williamsonian tradeoff”: Still fundamental to competition law enforcement  AER 1968  Triangles and rectangles  Information asymmetries and burdens of proof  “Cognizable” efficiencies: real, merger-specific, no less anti-competitive way to achieve2
  3. 3. USDOJ v. AT&T and T-Mobile USA • March 20: AT&T announces intent to acquire T-Mobile USA for $39 billion • April 21: AT&T files formal merger proposal with FCC • August 31: DOJ files complaint in court, challenging deal • November 22: FCC chairman calls for (unusual) administrative hearing • November 24: AT&T withdraws FCC filing, vows to continue fighting DOJ in court • November 29: FCC issues “staff report” critical of deal • December 19: AT&T abandons deal3
  4. 4. “Horizontal Merger Guidelines” of the US competition agencies  Traditionally a 5-step procedure:  Market definition  Product  Geographic  Market structure  Barriers to Entry  Competitive effects  Coordinated effects (Fellner, Stigler)  Unilateral effects (Hotelling)  Efficiencies  http://www.justice.gov/atr/public/guidelines/hmg-2010.html4
  5. 5. “Mobile wireless telecommunications” industry structure • 4 principal national service providers – Approximate reported market shares: – Verizon 35% – AT&T 32% – Sprint Nextel 20% – T-Mobile USA 13% • Source: FCC, Fourteenth Report, May 2010, Table C-4 • A number of local and regional service providers – US Cellular, MetroPCS, Leap, Cellular South, others • DOJ: Post-merger HHI over 3100, change in HHI from merger almost 7005
  6. 6. Competitive issues • Geographic market: national or local? – DOJ: Some elements of each, but high concentration either way • Product market: different for individuals, large firms? – DOJ: “Enterprise” customers require national network • Ability for small firms to expand and/or new firms to enter – Barriers: Spectrum availability, economies of scale of large incumbents, nationwide network, strong brand name • Competitive effects • T-Mobile history as innovator, aggressive pricer • All in all, a merger that looked anticompetitive under US law6
  7. 7. Unusually strong focus by merging companies on efficiencies claims • Engineering model: efficiencies “immense”, “enormous” • Economics model: on this basis, merger procompetitive • “The precise definitions of the product and geographic markets are not central to the evaluation of the proposed transaction.” (AT&T economists’ reply declaration, June 9) • The “Williamsonian tradeoff ”? Yes and no.7
  8. 8. The “Williamsonian tradeoff”?  Yes, because the parties were claiming huge efficiencies despite loss of competition  No, because efficiencies claims were so huge that the parties claimed no “tradeoff ”: lower costs would yield lower prices8
  9. 9. Evaluating the claims • FCC staff report: Efficiencies claims “seriously flawed”, “implausible”, and “extremely sensitive to adjustments” • “But-for” investment behavior of firms looked inept • Value of efficiencies claims not made public, but we infer claimed cost reduction of 14-26% • Stepping back: Was this a credible claim for a firm already as huge as AT&T?9
  10. 10. Another way to look at efficiencies claims  Economists usually find that average costs decline over a range of outputs, then flatten out, and perhaps rise at some point: respectively, economies of scale, constant returns to scale, and diseconomies of scale  Network industries (like telecomms) have larger range of economies of scale than others10
  11. 11. Another way to look at efficiencies claims (2)  “Quantity” may refer to firm size or density of operations  AT&T claimed efficiencies in both categories, but apparently more for density11
  12. 12. Another way to look at efficiencies claims (3) • How likely is it that a firm as large as AT&T, with dense urban operations, is still operating in a region of such large unexhausted economies of scale? • And if it is, is this sector a “natural monopoly”? Should we then allow AT&T/T- Mobile to merger with Verizon and Sprint, to achieve even greater efficiencies?12
  13. 13. Econometric estimates of Scale Economies and Returns to Scale (by firm mobile revenues) 1.20 1.00 0.80 0.60 SE RTS 0.40 0.20 0.0013
  14. 14. In the end...  Companies abandoned the deal, and AT&T paid T-Mobile a huge break-up fee.  Some commentators: Important case for U.S. antitrust law. Would court actually weigh competitive harms against estimated efficiencies?  There are trial and appeals court decisions using this “Williamsonian tradeoff ”, but Supreme Court has not ruled.14

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