George Priest, professor of economics and law at Yale, clearly outlines the main errors of the Obama administration’s decision to oppose the AT&T/T-Mobile merger and cites relevant evidence backing the view:
It is very difficult at an abstract level to know what the effects of a merger or acquisition will be on competition within an industry. Firms may merge to create market power and increase prices, though they may also merge to create efficiencies that lower prices.
The Justice Department presumes that the acquisition of T-Mobile (the fourth largest wireless provider) by AT&T (the second largest) will lead to “higher prices . . . and lower quality products” based on the high market share that would result. But market share is a very rough proxy for market power and essentially meaningless in a network industry.
There are strong reasons to predict that AT&T’s acquisition will lower prices and improve product quality. First, there’s lots of competition in the wireless market. Prices have been declining progressively over time. There are many local market competitors with discount and pre-paid plans….
Second, the best evidence of the prospective effect of a proposed acquisition is the response of competitors that will face the combined firms. The chief competitor, Sprint, the third largest wireless company, has been lobbying to stop the merger from its first announcement.
If the acquisition would lead to increased prices and lower quality products as the Justice Department has claimed, Sprint would be better off after the acquisition… Sprint would oppose the acquisition—as it has—only if it thought that the merger would put it in a worse position by increasing the competitive pressures that it already faces.
The market—though not the Obama administration—understands this point. On the day that the Justice Department announced its opposition to the acquisition, Sprint’s share price rose 5.9%, reflecting investors’ belief that Sprint will be in a better competitive position without the acquisition.
The Obama administration also claimed blocking the merger would protect jobs; Priest nails the response:
The Obama administration’s emphasis on job maintenance is even more confused. The administration has argued that the acquisition should be opposed because mergers reduce employment by eliminating redundant jobs. But a sound economy is not built on redundant jobs. An economy becomes stronger as redundant jobs are eliminated, costs and prices reduced, and the effective wealth of the nation enhanced. A major reason that the Obama administration’s efforts to stimulate the economy have failed is that it has consistently poured money into negative-value investments.
[See also the Streetwise Professor on Priest’s article.]