Why the T-Mobile–Sprint Merger Will Likely Lead to Higher Prices and Lower Quality

The rise in prices of mobile services risks imposing a higher tax on most households, higher than any possible tax rebate they might receive. 

 

 

Photo by Betty Longbottom [CC BY-SA 2.0]

The promise of the Tax Cuts and Jobs Act (TCJA) was to put money in the pocket of the average consumer. Whether it will accomplish this goal is still in doubt even amongst some legislators who voted for it, but whatever positive outcome it may have risks being undone by the newly announced T-Mobile-Sprint merger, should the Department of Justice let it go through. The rise in prices of mobile services risks imposing a higher tax on most households, higher than any possible tax rebate they might receive. 

 

This is not the message the two companies want to send. T-Mobile CEO John Legere said on Sunday that the merger will allow for “fierce” competition with Verizon and AT&T and provide “lower prices, more innovation, and a second-to-none network experience.” This refrain is a common one among mobile operators: because mobile communication is a business with high fixed costs and low marginal costs, the argument goes, too much competition can hurt firms’ ability to upgrade their technology and drive down quality of service provision. But while this outcome is theoretically plausible, the evidence suggests that higher concentration will lead to higher prices and, if anything, lower quality. 

 

A Stigler Center Working Paper Mara Faccio of Purdue and I wrote shows that mobile operators in the United States already charge exorbitant rates compared to their counterparts in two countries with similar regulatory regimes—Germany and Denmark. The increased concentration with this move from four to three service providers is likely to drive prices up even further. If US consumers paid equivalent rates to those in Denmark—where European regulators recently blocked a proposed merger between Three and O2 in order to preserve a four-operator market structure—they would save $44 billion a year, and fully $65 billion if they paid the same rates as German consumers.

 

It is true that some segment of these figures could represent a premium to service quality (in 2013 4G coverage in the United States stood at 95.1 percent compared to 92.37 percent in Denmark and 64.54 percent in Germany). Yet Faccio and I find that the entire difference seems to be capitalized in the stock prices, suggesting it is a pure transfer from mobile users to shareholders. Recent research from Genakos, Valletti, and Verboven also documents deleterious effects of concentration on end user prices in mobile communications in 33 OECD countries.

 

In short, if the T-Mobile–Sprint merger proceeds, consumers will find themselves in an even more lopsided market position vis-à-vis their cellular providers. Faccio and I argued in our paper that the mobile telecoms market structure is the outcome of political determinants; an approval of this merger could be just the latest example of these political forces at work. American taxpayers may well find themselves paying for apparent victories like the passage of the TCJA with countervailing increases in market power that transfer that income straight back to shareholders.

 

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