WASHINGTON: In spite of fears of less competition in the communications space, the just-announced T-Mobile merger with Sprint is a good idea. When we examine the total impact of the deal, the pros far outweigh any cons. The government should promptly approve this deal, with few if any reservations.
T-Mobile Sprint merger would reduce four carriers to three.
USA Today provides the typical negative opinion on the proposed merger deal:
“Time and again, corporations promise that mergers will bring untold benefits to consumers. But it doesn’t take an advanced degree in economics to understand that when our choices — already so meager that they can be counted on one hand — are further slashed, the results are usually the same: Competition is slackened, innovation is dampened, and prices go up.”
True, since AT&T, Verizon, Sprint and T-Mobile are the four carriers that currently dominate the market, the proposed merger does leave only three major players. Yet rarely mentioned: there are at least 6 more companies that could be poised to grab market share.
The reduction in competition usually means prices will increase. But that assumes no new firms will enter the market. It also assumes that all firms can acquire enough capital to invest in innovation.
If, after the merger, the three major carriers did raise prices, the smaller competitors would likely keep their price the same. One or more of them could even lower their prices if the competition for market share intensified.
It is certainly easy to see small but viable competitors like MetroPCS, Boost Mobile, Cricket Wireless, Virgin Mobile, US Mobile or US Cellular getting involved in a price war for market share.
Let’s not forget Comcast and Charter Communications. Both major cable companies could enter the cellular market as well. With all of this competition and with a huge investment needed to implement 5G technologies, it is no wonder that firms want to merge. Or grow.
The Department of Justice (DOJ) must approve this merger to ensure that there is adequate competition in the future.
The T-Mobile / Sprint merger deal is a prime example of a maturing market.
Accepted economic theory says if a market has four or fewer firms whose total market share exceeds 70 percent, the market is not competitive. As such, an uncompetitive market typically leads to higher prices and poorer quality for consumers. The Federal government is supposed to ensure that markets remain competitive by carefully examining mergers and acquisitions (M&A) in such markets.
Economists refer to this type of market as an “oligopoly.” But perhaps there is another way to look at the issue when it comes to the area of cellular communications and networks. Most oligopolies started out as competitive markets. Over time in some of these markets, circumstances and technologies changed. As some markets mature, they sometimes discover that consumers can gain greater benefits from fewer competing firms rather than more. Instead of dealing with many relatively inefficient firms, consumers can choose among fewer but more efficient firms. This can actually lower costs to the remaining firms, which eventually leads to reduced prices.
This phenomenon occurs again and again in almost all mature markets. Look at the oil industry, the automotive industry, the computer manufacturing industry and the software industry as a service industries. Each of these industries started with many relatively inefficient producers, and later matured into a few more efficient ones.
The cellular industry has now become mature.
Cell phones have been on the market for about 25 years or so. If you include traditional landline telephone companies, the communications and telephony industries go back considerably further than that. During that time, numerous firms in this area consolidated or merged, failed, or left the market entirely. Others entered the market. This industry is currently in consolidation mode, and it’s happening right now. The T-Mobile / Sprint merger is only the latest example.
Moving ahead, in order for firms to maintain a competitive advantage, they must improve the quality of their service and/or reduce prices. Smaller companies that have no technological or service advantage will choose to compete on price.
Larger firms, with more customers and higher overhead, will need to compete by offering better quality service. The next generation (5G) of cell phone service will initially be supplied by these large firms. Verizon, AT&T and the merged T-Mobile / Sprint will be the ones with enough capital to invest and implement this next generation service.
Without the merger, neither Sprint nor T-Mobile would have the resources to implement 5G. That would mean only two firms would initially offer that new technology. That means less competition, not more.
Let the marketplace determine the number of competing firms.
Usually, market forces work to determine the optimum number of firms that can efficiently supply a given market. Right now, the market tells us it needs another large firm in the cellular space so that competition occurs whenever key technical advances roll out. Given that ten or more firms remain in the market after the merger, DOJ should promptly approve the T-Mobile / Sprint merger.
The merger does not reduce competition, and it will improve efficiency. For both reasons, it’s good for the companies and good for consumers as well.