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Home | Library | The Feds Block AT&T's Merger with T-Mobile

The Feds Block AT&T's Merger with T-Mobile

September 5, 2011

Tags Free MarketsInterventionism

Last week the Justice Department sued to block AT&T's proposed $39 billion acquisition of T-Mobile. The government claimed that the merger would reduce competition and thereby hurt consumers. Beyond the hypocrisy of the federal government complaining about anticompetitive measures, antitrust action is wrong on moral, theoretical, and practical grounds. A free market based on voluntary exchange of property would foster lower prices and better service for cell-phone users.

The Government's Position

In typical fashion, the representatives of the US government have claimed that they are the servants of the public:

The Justice Department's complaint, which was filed in United States District Court in Washington, said that T-Mobile "places important competitive pressure on its three larger rivals, particularly in terms of pricing, a critically important aspect of competition."

The complaint also highlighted T-Mobile's high-speed network and its innovations in technology, noting that it was the first to use Google's Android operating system and BlackBerry wireless email, among other things.

"AT&T's elimination of T-Mobile as an independent, low-priced rival would remove a significant competitive force from the market," the complaint said. "Thus, unless this acquisition is enjoined, customers of mobile wireless telecommunications services likely will face higher prices, less product variety and innovation, and poorer quality services due to reduced incentives to invest than would exist absent the merger."

In the first place, it is rich to hear agents of the federal government express their sympathy for the beleaguered consumer. Even the most basic study of economics leads a person to realize that the US government is the biggest violator of consumer welfare on the planet. Whether it's tariffs, minimum-wage laws, labyrinthine tax codes, or thousands of counterproductive business regulations, the US government is an expert on foisting "higher prices, less product variety and innovation, and poorer quality services" on American consumers.

Yet even putting the hypocrisy aside, there are serious problems with the textbook case for antitrust enforcement. These problems involve moral, theoretical, and practical considerations.

Moral Objections to Antitrust

From a libertarian standpoint, the most obvious and immediate objection to antitrust enforcement is that it violates basic property rights. Contrary to some of the reader comments following the news article linked above, the Justice Department isn't "protecting" T-Mobile from being gobbled up by Big Bad AT&T. No, when a corporate merger goes through, it's because a sufficient number of shareholders of both corporations approve of the deal. (Note that this is even true of so-called hostile takeovers.)

The government's lawsuit blocking the proposed merger limits what the owners of AT&T and T-Mobile may do with their property, even though their intended merger wouldn't have violated the property rights of anybody else. As such, the government's action is invalid on standard libertarian grounds.

The Theoretical Case against Antitrust

There is a significant body of work questioning antitrust legislation even on purely theoretical economic grounds. In the Austrian tradition, a classic work is Dominick Armentano's Antitrust: The Case for Repeal. For those who prefer lectures to books, Thomas DiLorenzo's "Monopoly and Competition" is an excellent introduction to the Austrian view in this area.

"There is nothing magical about having a certain number of competitors in an industry."

The basic Austrian position is that so long as we have free entry into an industry — meaning there are no special government privileges granted to the incumbents — then there is healthy competition, keeping entrepreneurs on their toes. If the entrenched businesses get lazy and let quality suffer too much, or if they get greedy and raise prices too much, then new firms will enter the industry and capture market share.

There is nothing magical about having a certain number of competitors in an industry. In the case of cell-phone service, we have no reason to suppose that having three dominant firms is more efficient or serves customers better than having two dominant firms. Is the current number of firms optimal? If so, what a coincidence! If not, why not have the Justice Department break up AT&T into 14 smaller firms — or perhaps 13 or 15? Who can say?

The cell-phone industry is a classic example of "network goods," where the utility of a product or service partly depends on how many other people are using it. It is also a classic example of economies of scale, where the unit cost of servicing (say) 100 customers is much higher than the unit cost of servicing 100,000 customers.

Mainstream economic theory can demonstrate "market failure" in such industries whether the companies are coming or going. If we see certain types of industry characterized by numerous firms with small market share, it is proof that there is "wasteful" redundancy, requiring benevolent government intervention. (This is part of the standard justification for government regulation of traditional phone service, as well as other utilities.) And yet when we see the market responding to such realities by consolidation, the Justice Department pounces because of "restricting competition."

Yes, if government officials had perfect knowledge of all technological possibilities and customer demand, and if we could trust those officials to properly implement solutions in real time, then theoretically government regulation could improve on the spontaneous outcome of decentralized markets.

In reality neither assumption holds. In particular, when an entrepreneur introduces an entirely new product, he or she temporarily has a "monopoly" in the layperson's understanding. If we then applied textbook models to the situation, we would be horrified at the high prices and low output in this "monopolized" industry. Why, if only dozens of other competitors had the same "production function," then output would be higher and prices would be lower. The market fails!

Yet this is nonsense. By stipulation, nobody knew about the new product or service until the innovative entrepreneur dreamed it up. The temporary period of relatively high earnings is part of the prize that motivates entrepreneurs to think along these lines in the first place. If the government cracks down every time somebody invents a new product or service — on the grounds of protecting the consumer — then consumers will be worse off.

"Even the most basic study of economics leads a person to realize that the US government is the biggest violator of consumer welfare on the planet."

In a free market, firms can only become "dominant" by serving customers better than their rivals. Even if a firm has "vanquished" all of its competitors, it is still vulnerable to competition from newcomers. In the 1970s, IBM was considered an impregnable corporation, which allegedly had complete control over the computer industry. In the 1990s, people thought the same of Microsoft, while nowadays they think it of Google — not realizing that it too might be a dinosaur in a decade.

In more recent times, Facebook seemed to have a monopoly on social-networking sites — after all, it seemed almost by definition impossible for a newcomer to get people to switch over, once so many were already using Facebook. And yet as Jeff Tucker explains, Google+ identified some fatal drawbacks of the Facebook approach, and is currently doing what seemed to many impossible when the Facebook movie came out.

Antitrust Enforcement: Corrupt in Practice

In the previous section, I offered some theoretical objections to the standard economic rationale for antitrust enforcement. Yet in the real world, the case against antitrust is even more obvious: typically, lawsuits against giant corporations aren't brought by disinterested academics who draw cost and demand curves on their blackboard to see what will best help the public.

On the contrary, the typical antitrust case is filed by the unsuccessful competitors of the dominant firms. As Dominick Armentano explained in a 1998 interview,

Research has shown that [antitrust legislation] began with business interests wanting their competitors regulated. That's true for state-level antitrust. And if you go back into the origins of the Sherman Act, it's clear that less efficient petroleum competitors wanted to get a federal law to regulate the activities of the supposed petroleum trust.

There is very little controversy about the Federal Trade Act of 1914: small business interests wanted a law that would come down on large businesses. That's why the law was written. The Robinson-Patman Act that came out of the Great Depression grew out of special-interest pleading. The U.S. Wholesale Grocers Association ended up writing the Act itself, and simply got Robinson and Patman to sponsor a law aimed specifically at A&P.

In short, there was no golden age of antitrust when monopolistic abuse was running rampant in a free market, and when government stepped in to guard the public interest. Antitrust law has always been legally ambiguous, theoretically untenable, and empirically unwarranted. And let's say we can't establish that antitrust originated as special-interest law. The point is that it has been used as special-interest law. That's the way the law works in practice.

Conclusion

Antitrust laws are objectionable on grounds of basic morality, economic theory, and historical practice. Rather than trusting the federal government — of all organizations! — to ensure low prices and high quality for cell-phone users, Americans should clamor for a truly free market.


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