Big mergers: Distinguishing the public interest from special interests

Too many cooks really can spoil the broth. The system is stacked against merger petitioners because it often traps them between competing regulators. Telecom and transportation are good examples. There is no good reason for giving the Federal Communications Commission or Department of Transportation a second bite of the apple after a merger has passed muster with the Federal Trade Commission or the Department of Justice. Indeed, the practical import of duplicative reviews is to give interest groups (both business and non-profits) enhanced opportunities for special pleading. And far too often, what’s good for the best-organized pleaders is not good for consumers.
 
Beware of complaints by competitors. Sprint, responding to the prospect of the telecom merger, argues that it would be forced to pay higher prices for access to the big guys’ landline networks. The real issue, though, isn’t whether Sprint would be hurt, but whether consumers would on balance gain more from efficient use of scarce spectrum than they would lose from having one less independent wireless carrier.
 
Sprint is making its broad case against the merger based largely on the hypothetical that increased concentration is bad. The FCC made a similar assumption in a recent report, equating market concentration with a decline in competition in the wireless industry. But as Harvard economist Joseph Schumpeter pointed out sixty-plus years ago, concentration need not be bad for consumers if it gives the surviving firms the means and the incentive to accelerate innovation.
 
Base policy on facts. The evidence tying market concentration to industry performance is weak, particularly in industries in which products and services are changing rapidly. A better approach would be to look at direct evidence of links between concentration and prices, as the FTC did in examining the proposed Staples-Office Depot merger.
 
In the case of the telecom merger, what ought to matter is how taking T-Mobile out of the game will likely affect prices, output and the incentive to innovate. We think a strong argument can be made that output will go up and average prices down (especially in the sharply contested arena of wireless broadband), but realize that’s a hard call. What’s plain, though, is that the smaller wireless carriers including MetroPCS and Leap Wireless are lean and flexible, and capable of carving niches out of the markets of the two giants, Verizon and AT&T.
 
Regulation begets regulation in markets like wireless communications, where success turns almost as much on government favor as it does on offering the right products for the right prices. The big question in the ATT/T-Mobile merger is whether the regulators have the discipline to judge this marriage on the merits for consumers, rather than seeking a solution that least offends those with the most power.

Robert Hahn is director of economics at the Smith School, Oxford, and a senior fellow at the Georgetown Center for Business and Public Policy. Peter Passell is a senior fellow at the Milken Institute and former economic news columnist at The New York Times. They are co-founders of Regulation2point0.org, a web portal on regulatory policy. Note: The authors have consulted for telecommunications and information technology companies.