Would an AT&T, T-Mobile Merger Be Anticompetitive?

by robekulick

Well, the stock market seems to say no. When the DOJ announced that it would seek to block AT&T and T-Mobile from merging, Sprint’s stock went up went up 6%:

http://blogs.wsj.com/marketbeat/2011/08/31/sprint-cheers-att-jeers-doj-saying-ix-nay-on-the-erger-may/

People generally think along the lines that business is a zero sum game. So regardless of whether the proposed merger is anticompetitive, it might seem like Sprint stock should go up just because something bad happened to AT&T. However, economic logic provides an interesting counter to this view.

It turns out that, all things equal, it is better for a firm to compete against another firm that has sufficient monopoly power to raise its prices. Why? Because if the firm with monopoly power raises its prices, that will allow the competitor (Sprint in this case) to raise prices too without the threat of people substituting away from it to AT&T. On the other hand, it is bad for a firm to compete against a more efficient firm since greater efficiency allows firms to ¬†operate with lower costs and offer lower prices. Thus, if the merger is procompetitive, resulting in AT&T becoming a more efficient company, Sprint would likely suffer as a result of AT&T’s ability to lower prices and take business away from Sprint.

Thus, the fact that Sprint’s stock went up so much after the announcement that the DOJ would attempt to block the merger actually suggests that the market believes that the merger is procompetitive–that is, allowing AT&T and T-Mobile to merge would be good for consumers but bad for Sprint!

Btw, thanks to Anna for pointing out that I haven’t said anything about this issue yet!

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