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AT&T and T-Mobile Merger

3Qs with Neal F. Finnegan Distinguished Professor of Economics John Kwoka
April 5th, 2011

Wireless carrier AT&T Inc. has proposed buying T-Mobile for $39 billion, a merger that would create the nation’s largest cellular carrier. John Kwoka, Neal F. Finnegan Distinguished Professor of Economics at Northeastern University, discusses the potential impact of the deal.

What difficulties do AT&T and T-Mobile face in having the merger approved?

The wireless industry has only four truly national carriers, so the proposed merger of AT&T and T-Mobile raises some hard questions about the effects on pricing and service.  T-Mobile offers cheaper and more comprehensive service packages than other carriers, and those are likely to disappear after the merger.  That cannot be good news for consumers.  On the other hand, AT&T claims that combining the networks will alleviate congestion and improve voice and data service.  The outcome of the antitrust review by the Justice Department will depend on which of these arguments can best be supported.

The merger will also need to be approved by the Federal Communications Commission.  The FCC evaluates mergers by a “public interest” standard, which includes competition but also broader policy objectives.  AT&T has claimed, for example, that this merger will help bring wireless service to rural areas and smaller communities–something that will appeal to the FCC.

How would this merger affect the wireless industry?

The merged AT&T–T-Mobile would have about a 45 percent share of the market and leapfrog Verizon, which is now the largest carrier.  Together, the two will have about 80 percent of the national market, and most markets work better with more competitors.  Worse yet, the merger might jeopardize Sprint, which at about 18 percent of the market, would be a lot smaller than the other two.  If Sprint ended up in trouble and got acquired by, say, Verizon, that would leave the industry with only two major carriers and even greater concerns about competition.  One thing we should not expect, though, is new entry:  Because of the lack of available spectrum and the capital costs of infrastructure, no new company can get into the market, so policy will need to review carefully what is happening to the few competitors that we now have.

What issues arise when large business mergers take place?

The Justice Department Antitrust Division and the Federal Trade Commission look for indications that any proposed merger may lead to higher prices or other adverse effects on consumers, but also any cost efficiencies or other benefits that may weigh in its favor.  In the past, mergers that reduced the number of significant competitors from 4 to 3–as in the case of AT&T and T-Mobile–have been challenged about 75 percent of the time, so these companies may not find it easy to convince the antitrust agencies.

Courtesy of CSSH Dean’s Office


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