Why Did Sprint Pile On the DOJ’s AT&T / T-Mobile Suit?

by on September 6, 2011 · 0 comments

[Cross posted at Truthonthemarket]

So, the AT&T / T-Mobile transaction gets more and more interesting.  Sprint has filed a complaint challenging the transaction.  I’ve been commenting on the weakness of the DOJ complaint and in particular, its heavy reliance on market structure to make inferences about competitive effects.  The heavy dose of structural presumption in the DOJ complaint — especially in light of the DOJ / FTC’s new Horizontal Merger Guidelines which stress reducing that emphasis because it is grounded in outdated economic thinking in favor of analysis of actual competitive effects — reads more like a 1960s complaint than a modern post-2010 Guidelines approach.

There is a question that jumps out here.  What does Sprint get for jumping into full litigation mode rather than free-riding upon the DOJ’s case?  They could certainly free-ride and retain some influence over the DOJ case with economic submissions.  The DOJ is not a passive plaintiff.  This is the DOJ of “reinvigorated” antitrust enforcement.  There is an even more obvious cost to getting involved.  The conventional antitrust wisdom requires skepticism of private suits by rivals for the reasons I discussed here.   Rivals often have a financial incentive to sue more efficient competitors.  Various substantive and procedural stands of antitrust attempt to minimize the costs of providing rivals with generous remedies and a private right of action under the antitrust laws.  Suffice it to say, a rival suit doesn’t get the same attention as one brought by the DOJ or FTC.

So why do it?

I think the answer is pretty clear.  There are at least two important inferences to draw from Sprint’s complaint.

The first is that it is a sign that the DOJ’s structure-based complaint is pretty weak sauce.  David Balto described the complaint as missing “the red meat.”  Its heavy on reliance on outdated structural presumptions, strays far from the intellectual foundations of the new Merger Guidelines, doesn’t acknowledge efficiencies, and has been embarrassingly shown up by the market reaction.  I certainly agree with Balto that the DOJ complaint isn’t the agency’s best work.  So, apparently did the market — with Sprint’s stock price surging instead of the decline predicted by various theories of competitive harm posited in the complaint.

Sprint, by filing this claim, reveals its view that the DOJ is not likely to prevail on the merits on those claims.  Or at a minimum that Sprint’s involvement increases the likelihood.  Given the skepticism about rival suits, I’m skeptical.  To reconcile these views one must read the Sprint complaint.  It heavily pushes an “exclusionary theory” of the merger (i.e. “vertical effects”) omitted by the DOJ in its own complaint.  The basic theory is that the post-merger firm will deprive rivals from access to backhaul or handsets.  I’ve argued that the exclusionary theory doesn’t fare much better in explaining the market reaction to the DOJ’s challenge.  But it at least has going for it that it can explain the Sprint’s stock price reaction: if the merger successfully prevents exclusion, it should improve outcomes for rivals.  The problem is that this explanation doesn’t square too nicely with the market reaction of other rivals likely to suffer from exclusion (smaller carriers) and big guys like Verizon who would benefit from watching AT&T bear the full cost of excluding rivals (an expensive strategy) while it reaped the benefits.

Thus, I think the second lesson is that its pretty clear that Sprint views the omission of these exclusionary theories as a critical weakness in the DOJ’s complaint — critical enough to take the relatively rare step of filing a separate private challenge.  Given the large increase in Sprint’s stock price in reaction to the news of challenge — it’s got a lot at stake here and it’s willing to spend some of that rather than free-riding on the DOJ challenge for the chance to prove it is right.  I remain skeptical; but it’s an interesting development nonetheless.

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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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