No Facts, No Problem?

by on March 22, 2011 · 0 comments

[Cross-Posted at Truthonthemarket.com]

There has been, as is to be expected, plenty of casual analysis of the AT&T / T-Mobile merger to go around.  As I mentioned, I think there are a number of interesting issues to be resolved in an investigation with access to the facts necessary to conduct the appropriate analysis.  Annie Lowrey’s piece in Slate is one of the more egregious violators of the liberal application of “folk economics” to the merger while reaching some very confident conclusions concerning the competitive effects of the merger:

Merging AT&T and T-Mobile would reduce competition further, creating a wireless behemoth with more than 125 million customers and nudging the existing oligopoly closer to a duopoly. The new company would have more customers than Verizon, and three times as many as Sprint Nextel. It would control about 42 percent of the U.S. cell-phone market.

That means higher prices, full stop. The proposed deal is, in finance-speak, a “horizontal acquisition.” AT&T is not attempting to buy a company that makes software or runs network improvements or streamlines back-end systems. AT&T is buying a company that has the broadband it needs and cutting out a competitor to boot—a competitor that had, of late, pushed hard to compete on price. Perhaps it’s telling that AT&T has made no indications as of yet that it will keep T-Mobile’s lower rates.

Full stop?  I don’t think so.  Nothing in economic theory says so.  And by the way, 42 percent simply isn’t high enough to tell a merger to monopoly story here; and Lowrey concedes some efficiencies from the merger (“buying a company that has the broadband it needs” is an efficiency!).  To be clear, the merger may or may not pose competitive problems as a matter of fact.  The point is that serious analysis must be done in order to evaluate its likely competitive effects.  And of course, Lowrey (H/T: Yglesias) has no obligation to conduct serious analysis in a column — nor do I in a blog post. But this idea that the market concentration is an incredibly useful and — in her case, perfectly accurate — predictor of price effects is devoid of analytical content and also misleads on the relevant economics.

Quite the contrary, so undermined has been the confidence in the traditional concentration-price notions of horizontal merger analysis that the antitrust agencies’ 2010 Horizontal Merger Guidelines are premised in large part upon the notion that modern merger analysis considers shares to be an inherently unreliable predictor of competitive effects!!  (For what its worth, a recent The Wall Street Journal column discussing merger analysis makes the same mistake — that is, suggests that the merger analysis comes down to shares and HHIs.  It doesn’t.)

To be sure, the merger of large firms with relatively large shares may attract significant attention, may suggest that the analysis drags on for a longer period of time, and likely will provide an opportunity for the FCC to extract some concessions.  But what I’m talking about is the antitrust economics here, not the political economy.  That is, will the merger increase prices and harm consumers?  With respect to the substantive merits, there is a fact-intensive economic analysis that must be done before anybody makes strong predictions about competitive effects.  The antitrust agencies will conduct that analysis.  So will the parties.  Indeed, the reported $3 billion termination fee suggests that AT&T is fairly confident it will get this through; and it clearly thought of this in advance.  It is not as if the parties’ efficiencies contentions are facially implausible.  The idea that the merger could alleviate spectrum exhaustion, that there are efficiencies in spectrum holdings, and that this will facilitate expansion of LTE are worth investigating on the facts; just as the potentially anticompetitive theories are.   I don’t have strong opinions on the way that analysis will come out without doing it myself or at least having access to more data.

I’m only reacting to, and rejecting, the idea that we should simplify merger analysis to the dual propositions — that: (1) an increase in concentration leads to higher prices, and (2) when data doesn’t comport with (1) we can dismiss it by asserting without evidence that prices would have fallen even more.  This approach is, let’s just say, problematic.

In the meantime, the Sprint CEO has publicly criticized the deal.  As I’ve discussed previously, economic theory and evidence suggest that when rivals complain about a merger, it is likely to increase competition rather than reduce it.  This is, of course, a rule of thumb.  But it is one that generates much more reliable inferences than the simple view — rejected by both theory and evidence — that a reduction in the number of firms allows leads to higher prices.  Yglesias points out, on the other hand, that rival Verizon prices increased post-merger (but did it experience abnormal returns?  What about other rivals?), suggesting the market expects the merger to create market power.  At least there we are in the world of casual empiricism rather than misusing theory.

Adam Thierer here at TLF provides some insightful analysis as to the political economy of deal approval.   Karl Smith makes a similar point here.

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Joshua Wright / Joshua Wright is a Professor of Law at George Mason University School of Law and holds a courtesy appointment in the Department of Economics. Professor Wright was recently appointed as the inaugural Scholar in Residence at the Federal Trade Commission Bureau of Competition, where he served until Fall 2008. Professor Wright was a Visiting Professor at the University of Texas School of Law and was a Visiting Fellow at the Searle Center at the Northwestern University School of Law during the 2008-09 academic year. Professor Wright also regularly lectures on economics, empirical methods, and antitrust economics to state and federal judges through the George Mason University Law and Economics Center Judicial Education Program. Professor Wright received both a J.D. and a Ph.D. in economics from UCLA, where he was managing editor of the UCLA Law Review, and a B.A. in economics with highest departmental honors at the University of California, San Diego. Before coming to George Mason University School of Law, Professor Wright clerked for the Honorable James V. Selna of the Central District of California and taught at the Pepperdine University Graduate School of Public Policy. Professor Wright's areas of expertise include antitrust law and economics, consumer protection, empirical law and economics, intellectual property and the law and economics of contracts. His publications have appeared in leading academic journals, including the Journal of Law and Economics, Antitrust Law Journal, Competition Policy International, Northwestern Law Review, Supreme Court Economic Review, Yale Journal on Regulation, Journal of Competition Law and Economics, Review of Industrial Organization, Review of Law and Economics, and the UCLA Law Review. Professor Wright is also the co-editor of Pioneers of Law and Economics (Elgar Publishing) and Competition Policy and Patent Law under Uncertainty: Regulating Innovation (Cambridge Press). Professor Wright has also testified at the joint Department of Justice/ Federal Trade Commission Hearings on Section 2 of the Sherman Act, the Federal Trade Commission’s FTC at 100 Conference, and the DOJ/ FTC Hearings on the 2010 Horizontal Merger Guidelines.

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