Monday, August 27, 2018

What is Impact of Industry Concentration on Competition?

Mobile virtual network operators--especially smaller MVNOs--are warning that a proposed merger merger between T-Mobile US and Sprint will lead to more concentration and higher prices. Such warnings are as expected as the touted advantages claimed by industry segments evaluating any major changes in industry policy.

In some ways, it cannot be argued that the proposed merger makes the market more competitive. By definition, the merger reduces the number of major competitors in the market. Granted, on some measures the U.S. market still is less concentrated than some other major mobile markets.

And there is an argument to be made, in many segments of the communications business, that greater scale has become a fundamental requirement. And, in principle, a bigger number-three contestant could use its greater scale to push even harder at industry pricing levels and the value proposition.

But few observers seem to expect more competition as the end result of a merger between Sprint and T-Mobile US.

Even if one is of the opinion that merger rules are more relaxed now than under the prior presidential administration, some quantitative tests always are used by the Department of Justice when evaluating proposed mergers, and immediate past precedent might be a key issue.

The proposed merger of AT&T and T-Mobile in 2011 was scuttled because the Hirschman Herfindahl Index (“HHI”) would have increased by 700 points in an industry already classified by the HHI and highly concentrated. The HHI is a standard tool used by regulators globally and will be used again as Sprint and T-Mobile US propose to merge.

It is not incorrect to read the DoJ’s objections to that earlier merger as opposition to any merger between two of the four nationwide providers of mobile wireless services: AT&T, Verizon, T-Mobile and Sprint.

The proposed merger of the third- and fourth- largest U.S. mobile companies would increase the HHI by over 400 points, meaning market concentration, in an industry already deemed highly concentrated (if less concentrated than some other markets), would increase.

“Like the failed AT&T and T-Mobile merger a few years ago, the proposed merger between Sprint and T-Mobile will be presumed anticompetitive and thus heavily scrutinized by antitrust authorities,” says George Ford, Phoenix Center for Advanced Legal and Economic Public Policy Studies chief economist.

To be sure, executives from T-Mobile US and Sprint say the additional scale provided by the merger will allow the bigger firm to continue to be aggressive in attacking prices, or will allow the firm to invest in 5G at a faster rate.

But I have yet to find an equity analyst who believes that will happen. Quite the reverse is expected, in fact: less price competition in the U.S. mobile market. An oft-noted conclusion is that a bigger number three firm would have less need for price cuts as a primary competitive weapon. Not is that view confined to equity analysts and market researchers.

Nor will some market watchers think the recent DoJ opposition to the AT&T acquisition of
Time Warner--a vertical merger of the type that tends not to be challenged--is a good omen, on that score. If DoJ objects to a type of merger that usually is not viewed as problematic, what is DoJ going to do with a type of merger that, by definition, will be viewed as problematic?

To be sure, the telecom industry virtually always has been concentrated for most of the past 150 years. But the level of concentration grew more than 100 percent between 2000 and 2014.

Percent Change in Market Concentration and Regulation
2000-2014
Industry
HHI Index
Hospitals
11%
Health Insurance
79%
Banking
100%
Telecom
101%
Airlines
16%
Auto Industry
-34%
Energy
31%
Average Change
43%

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