Econ 1B MW
On March 20, 2011 AT&T announced that it had agreed to buy T-Mobile USA from Deutsche Telekom for $39 billion, in a deal that would create the largest wireless carrier in the nation and promised to reshape the industry. The transaction, one of the largest since the onset of the financial crisis, started a fierce battle in Washington as regulators weight the effect of the deal on competition and consumers. The deal would give AT&T and Verizon over 70% of the market share leaving Spring Nextel far behind from its opponent. The deal ultimately was drop by AT&T on Dec 19,2011 from the acknowledging that the Obama administration and the FCC is not in support of the merger and the Justice Department will take aggressive action of suing to block the merger.
This paper is segmented into four parts. Part one provides the background; the historical analysis of the problem by presenting the existing data and facts surrounding regulatory compliance specific to the telecommunications industry. Part two builds on this foundation and presents economic and policy analysis of regulation, monopolistic competiton, the Herfindahl Hirschman Index, horizontal mergers and anti trust law.
Part three presents the findings showing the impact of the merger on the telecommunication industry.
Part I. Background
If the merger happens, this could leave Sprint as the lone major nationwide competitor to AT&T and Verizon. "A combined AT&T and T-Mobile would be almost three times the size of Sprint, the third-largest wireless competitor," Sprint spokesman John Taylor said in a statement Sunday night. "If approved, the merger would result in a wireless industry dominated overwhelmingly by two vertically-integrated companies that control almost 80 percent of the U.S. wireless post-paid market, as well as the availability and price of key inputs such as backhaul and access needed by other wireless companies to compete."(Jenna)
The acquisition would give AT&T additional leverage against its main rival, Verizon. The newly combined company, bringing together AT&T’s 95.5 million wireless subscribers with T-Mobile’s 33.7 million customers, would account for roughly 42 percent of all wireless subscribers in the United States. Verizon has around 31 percent, said Charles Golvin, a telecommunications analyst at Forrester Research, with this kind of leverage power it is hard to believe that price will not raise, leaving consumer to suffer. Although AT&T claims the merger will create better coverage fewer drop call and faster newer 4G connection to the consumer, most economist said that will not be the case. "This transaction is all about consumers," Stephenson told the Senate Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights. "It's about keeping up with consumer demand. It's about having the capacity to drive innovation and competitive prices for consumers."(Ronald)
But sprint Nextel Chief Executive Daniel Hesse warn the regulator of FCC and Justice Department of antitrust the approval of the deal will result the wireless industry to be very alike in the 1980’s style duopoly were there was only two local telecom provider at that time. "We believe that the acquisition of T-Mobile USA by AT&T is a 'bridge too far' in consolidating too much market power in the hands of only two, similar companies," Hesse said. He believed that the combination of the two companies would reduce to three, from four, the number of major national wireless carriers, a group that also includes Verizon. That would be only a prelude to a further consolidation to two companies, as his own company would find it difficult to compete with the reach of AT&T/T-Mobile and Verizon. “I am not here to ask for a special break or to seek any conditions in connection with this takeover,” Mr. Hesse said. “I am here because