Monopoly Power Matters

Having issued a skeptical word or two in defense of the AT&T/T-Mobile merger, let me offer a skeptical word of opposition against this Heartland Institute cheerleading:

Those harping over this merger operate from a bizarre anti-business mind set. They have convinced themselves that it is the goal of every business to gobble up as much market share as possible – just so it finally has the power to abuse its customers. But no merger – not even one as large as this between T-Mobile and AT&T – repeals the corrective influence of free markets in the digital economy. In other words, no company is eager to ruin its brand no matter how big it gets.

That’s true. No company is eager to ruin its brand, but no company is eager to have low profits either. Companies balance the value of their brand against the value of high prices against the value of various kinds of costs. If there were only one cell phone operator, it would still need to worry that rapacious maltreatment of its customers would result in people simply refusing to use cell phones or else that it would tempt a new firm to enter the market. But starting up a competing cell phone operator would be difficult, risky, and expensive. You could get away with a lot of abuse before tempting someone new into the market. What’s more, as soon as the new firm was getting close to getting off the ground you could start cutting prices to pre-empt the new entrant. And the hypothetical new entrant is going to know that this might happen, which is a further deterrent to entering. The concern that a market with only two operators will be a version of that scenario is perfectly sensible and neither “bizarre” nor “anti-business.” And in general, any market with such high barriers to entry is going to feature very imperfect competition so it’s reasonable for people to scrutinize it unusually closely.