Sprint Merger with T-Mobile US Might Show Limits of Antitrust Policy

As we await a government decision on whether T-Mobile US or Sprint can merge, we also are hearing new arguments that antitrust decisions should not be made on the basis of harm to consumer welfare (high prices), but on the basis of "market structure."

In other words, even if no consumer harm is demonstrated (prices are zero or low, prices are dropping, consumers are getting lots of new products), antitrust should concern itself with supplier diversity (market structure), not prices or innovation. 

Monopoly, generally speaking, is not the issue. Monopoly is defined as “a market structure characterized by a single seller, selling a unique product in the market, and that is no longer characteristic of the U.S. market--mobile or fixed.

In a , the seller faces no competition, as he is the sole seller of goods with no close substitute.”

Most markets are oligopolies, though. Oligopoly is “a market structure with a small number of firms, none of which can keep the others from having significant influence.”

Some capital-intensive markets inherently are oligopolistic, though, and caused by limits on the number of suppliers who can stay in business, not by exercise of unfair market power, as argued by Phoenix Center Chief Economist George Ford.

So there are important potential implications if definitions are changed. Some markets might not be able to support more than a few players, no matter our preferences. In such cases, every effort to produce more competitors, and break up big companies, fails in the end, as scale is required at a significant level.

Put simply, only a few big companies can actually survive. In which case, efforts to break up big firms are bound to fail.

Consider the classic case of antitrust action against Standard Oil, which at one point might have had 90 percent market share.

“Between 1870 and 1885 the  price of refined kerosene dropped from 26 cents to 8 cents per gallon. In the same period, the Standard Oil Company reduced the [refining] costs per gallon from almost 3 cents in 1870 to 0.452 cents in 1885,” observers have noted.

In other words, consumers clearly benefited. But antitrust action was taken despite evidence of consumer harm, to help other competitors, not to protect consumers from high prices.

In essence, many argue for a return to such policies of helping suppliers, not consumers, since consumer harm cannot be clearly demonstrated.

It is debatable whether policies aimed at protecting suppliers work long term. Still, to the extent new antitrust action might be taken, it will be using non-direct and non-quantifiable measures of harm. Privacy protection seems the most-obvious new culprit.

The Antitrust Case Against Facebook by Dina Srinivasan links Facebook’s privacy policies with monopoly abuses, in keeping with a trend by some to revise traditional tests of market power, as it is difficult, under the existing framework, to find consumer harm when no actual price is charged for use of a product.

So the new tack is to enshrine new tests--privacy protection, mostly--of monopoly power that have no historic justification.

Many call this the New Brandeis school of antitrust, which argues that what matters is market structure, not consumer harm, since Internet era firms including Google, Facebook and Amazon provide consumer benefits at zero prices, or have demonstrably contributed to lower prices.

The subject of antitrust then becomes market structure itself, not consumer harm in the form of higher prices, for example. Some call this a shift to antimonopoly, rather than antitrust, with benefits that are more social and political than economic.

The enemy is “bigness,” not consumer welfare, though some might argue “bigness” is not the problem as much as the ability to exploit bigness. As a practical matter, the real-world test will be bigness itself. How well that will work, if at all, remains to be seen.

Historically, one might note that prior efforts to break up industry power have always resulted in re-accumulation of market share. Market structures do not remain fragmented, but re-concentrate. That is what happens when any competitor creates products that buyers consider superior.

One might note the European telecom regulatory community essentially moved in that direction in mandating wholesale policies for producers in the connectivity business, allowing multiple retailers to use a monopoly network.

That clearly produced more retail competition. It also has reduced profit margins in the industry that limit investment and innovation. It is not clear how much consumers have benefited. It seems fairly clear that investment has suffered.

Traditional antitrust violations that cause identifiable or potential “consumer harm.” The key concept here is “consumer harm,” not “producer harm.” That notion underlies consumer protection policies of all sorts, including actions to break up companies to promote more competition.

And that is where the emergence of “free to use” services and applications raises new questions for some, especially a shift of focus from protecting consumers to protecting producers. In other words, regulatory intervention is justified not because consumers are harmed in the old sense of high prices possible because of monopoly power, but despite the ability to quantify such harm.  

The idea that policy is organized around protecting producers, rather than consumers, is not new. But it is a shift back to acting even when consumer harm, in the form of higher prices, cannot be alleged.

Parenthetically, one might also ask what becomes of contestants in global markets, where scale matters, if “bigness” itself becomes grounds for antitrust or anti-monopoly action.

Sometimes, scale is necessary to compete. That is the argument, generally speaking, for the T-Mobile merger with Sprint. Only the merged firm can compete with AT&T and Verizon, many argue.

In that case, the New Brandeis focus on market structure will fail, as well. Oligopoly is an economic requirement, in the capital-intensive retail connectivity business.