09 Jul Effects of Merger On Market’s Concentration Ratio Discussion
Question Description
In granting (or prohibiting) proposed acquisitions or mergers in an industry, government regulators consider a number of factors, including the acquisition’s effect on concentration, ease of entry into the market, extent of ongoing price competition, and potential efficiency gains. In 2011, T-Mobile agreed to merge with AT&T at an acquisition price or $39 billion. However, facing opposition from the Department of Justice, the companies later abandoned their merger plans. In 2011, AT&T’s market share of the U.S. wireless market was 26.6 percent, with T-Mobile 12.2 percent, Verizon 31.3 percent, Sprint 11.9 percent, TracFone 5.0 percent, U.S. Cellular 3.1 percent, MetroPCS 2.3 percent, Cricket 1.6 percent, and numerous small providers making up the remaining 6 percent.
a. What would be the effect of the merger on the market’s concentration ratio? On the Herfindahl-Hirschman Index (HHI)?
b. Antitrust guidelines call for close scrutiny of mergers in moderately concentrated markets (HHI between 1,500 and 2,500) if the resulting HHI increase is more than 100 points. How would this rule apply to the AT&T merger with T-Mobile? How would it apply to a hypothetical merger between T-Mobile and TracFone?
c. AT&T argued that the merger would extend its network, providing more reliable and faster cell phone service (particularly to existing T-Mobile customers who on average have lower-grade service plans at cheaper rates). Market observers were worried that after the merger, AT&T would raise cellular rates to some customer segments. Briefly evaluate these pros and cons.
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