So, the AT&T / T-Mobile transaction gets more and more interesting. Sprint has filed a complaint challenging the transaction. I’ve been commenting on the weakness of the DOJ complaint and in particular, its heavy reliance on market structure to make inferences about competitive effects. The heavy dose of structural presumption in the DOJ complaint — especially in light of the DOJ / FTC’s new Horizontal Merger Guidelines which stress reducing that emphasis because it is grounded in outdated economic thinking in favor of analysis of actual competitive effects — reads more like a 1960s complaint than a modern post-2010 Guidelines approach.
There is a question that jumps out here. What does Sprint get for jumping into full litigation mode rather than free-riding upon the DOJ’s case? They could certainly free-ride and retain some influence over the DOJ case with economic submissions. The DOJ is not a passive plaintiff. This is the DOJ of “reinvigorated” antitrust enforcement. There is an even more obvious cost to getting involved. The conventional antitrust wisdom requires skepticism of private suits by rivals for the reasons I discussed here. Rivals often have a financial incentive to sue more efficient competitors. Various substantive and procedural stands of antitrust attempt to minimize the costs of providing rivals with generous remedies and a private right of action under the antitrust laws. Suffice it to say, a rival suit doesn’t get the same attention as one brought by the DOJ or FTC.
So why do it?
I think the answer is pretty clear. There are at least two important inferences to draw from Sprint’s complaint.
The first is that it is a sign that the DOJ’s structure-based complaint is pretty weak sauce. David Balto described the complaint as missing “the red meat.” Its heavy on reliance on outdated structural presumptions, strays far from the intellectual foundations of the new Merger Guidelines, doesn’t acknowledge efficiencies, and has been embarrassingly shown up by the market reaction. I certainly agree with Balto that the DOJ complaint isn’t the agency’s best work. So, apparently did the market — with Sprint’s stock price surging instead of the decline predicted by various theories of competitive harm posited in the complaint.
Sprint, by filing this claim, reveals its view that the DOJ is not likely to prevail on the merits on those claims. Or at a minimum that Sprint’s involvement increases the likelihood. Given the skepticism about rival suits, I’m skeptical. To reconcile these views one must read the Sprint complaint. It heavily pushes an “exclusionary theory” of the merger (i.e. “vertical effects”) omitted by the DOJ in its own complaint. The basic theory is that the post-merger firm will deprive rivals from access to backhaul or handsets. I’ve argued that the exclusionary theory doesn’t fare much better in explaining the market reaction to the DOJ’s challenge. But it at least has going for it that it can explain the Sprint’s stock price reaction: if the merger successfully prevents exclusion, it should improve outcomes for rivals. The problem is that this explanation doesn’t square too nicely with the market reaction of other rivals likely to suffer from exclusion (smaller carriers) and big guys like Verizon who would benefit from watching AT&T bear the full cost of excluding rivals (an expensive strategy) while it reaped the benefits.
Thus, I think the second lesson is that its pretty clear that Sprint views the omission of these exclusionary theories as a critical weakness in the DOJ’s complaint — critical enough to take the relatively rare step of filing a separate private challenge. Given large increase in Sprint’s stock in reaction to the news of challenge — its got a lot at stake here and its willing to spend some of that rather than free-riding on the DOJ challenge for the chance to prove it is right. I remain skeptical; but its an interesting development nonetheless.
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It is a great conversation, but I would really like to “chew” on the red meat angle that Josh first brought up. I am skeptical that DOJ filed this complaint to set some sort of bid/ask with T, but maybe. I think they wrote a simple, straightforward complaint seeking to bar the merger based on the case law. They can save the guidelines stuff for one-sided consent decrees. Just saying.
Baseball: maybe so regarding the simple complaint. I agree its plenty simple and straightforward. But its not as if “the case law” is read independent of the agency guidelines. Certainly, the FTC and DOJ hope it is not. Thus, there is no clear “precedent” under which this complaint is particularly persuasive if it runs too far afield of the Guidelines. What catches my attention is the gap between the Guidelines’ analytical framework and the complaint given (1) the adoption of the new Guidelines, and (2) that their primary marginal contribution was increasing evidence of effects and decreasing evidence on structure, and (3) the agencies care a great deal about adoption and acceptance of the Guidelines’ analytical framework in federal court. I don’t think the historical approach to treat the Guidelines as something for one-sided consent decrees. All of this is simply to say that the simple and straightforward complaint — which in my view is at some tension with at least the spirit of the Guidelines framework if not its letter — creates some non-trivial risk in terms of adoption and creating predictability and certainty for parties anticipating agency behavior. Perhaps it is a lesser risk if the case is settled. But it is not zero. And I obviously think worth noting.
Note also that the above can be true if (as you write below and I agree is highly likely) the agencies address the Guidelines framework in court at some point but not in the complaint to avoid the “you aren’t even following what is in your own Guidelines'” critique.
Any chance we can get back to the T/T-Mobile situation?
Agreed.
I’m going to cut off the general markets v. competition discussion here — as interesting as it is —- and encourage you two to take it to email if you’d like to continue further. No reason to hijack the thread.
Sorry. Did not mean too. Nice blog.
Not a problem. And thank you.
Dom Armentano
Let’s use some common sense here. Tell me you are not saying that there is no problem with the creation of monopolies in any market. It does not matter that such a monopoly will result in higher prices, lower service and less innovation.
If this is what the law is aying, and I do not believe it is, then the law should be changed. The country and markets lose.
“Free markets” are destroyed when government allows a voluntary merger?! Interesting concept. Like black is white and up is down. I thought, however, that in free markets owners of property are free (have the right to) to make contracts that merge their respective properties. And I thought that government interference with that “right” (or ownership) was the very definition of a property rights violation. In short, government “destroys” free markets when it violates ownership rights, the very opposite of what is asserted above. Now you may want to make an empirical case for government regulation of mergers (good luck) but your “protecting free markets” notion is a contradiction in terms.
Let’s see! In a hypothetical market of 4 companies, you are saying the market is free after they voluntarily combine and create a monopoly.
Markets are free when there are many producers competing for the business of many consumers.
Ownership of a business does not allow you to destroy free markets by taking over your competitors. Go back and read Econ 101.
‘People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public or in some contrivance to raise prices.’ (Adam Smith, The Wealth of Nations, 1776) More: http://bit.ly/nLY5A3
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Heavens! Finish the Adam Smith quote!
“It is impossible, indeed, to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less render them necessary.” The Wealth of Nations.
Smith held that any law (an antitrust law, presumably) that attempted to prevent a voluntary monopoly or conspiracy would “not be consistent with liberty and justice.” And to execute such a law, i.e., enforce it, would be inherently rights violating…”not consistent with liberty and justice.” In short, enforcing any law that restricts voluntary property rights violates the principles of liberty and justice. Could Smith be any clearer on this issue?!
The problem, of course, (and it is not unique) is that you are conflating your (incorrect) theory of “competition” (a declining number of competitors) with freedom and “rights” theory. They still teach that nonsense in Ec 101? Let me suggest, instead, that you read my “Antitrust and Monopoly: Anatomy of a Policy Failure” for a Smithian and Schumpeterian perspective on both competition and rights theory.
My point is the Comcast merger should never have been approved. Destroying free markets.
Often when attorneys start their war in court, the ramifications on the real world are forgotten. Oligopolies are harmful to free markets.When free markets are destroyed innovation, jobs, prices and yes efficiencies are destroyed.
I am a free market conservative. I voted republican in every presidential election since 1968, except one. It is obvious that our government must live within its means and do so in a manner as not to interfere with a functioning free market economy. If we desire to take control of government, we must demand government carry out one of its primary functions; protecting free markets from tyranny, both public and private. We are vocal about defending it from public tyranny, but silent when it comes to tyranny in the private sector.
“Experience should teach us to be most on guard to protect liberty when the government’s purposes are beneficial. Men born to freedom are naturally alert to repel invasion of liberty by evil-minded rulers. The greater dangers to liberty lurk in insidious encroachment by men of zeal, well-meaning but without understanding.” Justice Louis Brandeis 1928
Today our focus seems to be only on the tyranny of government when it comes to free markets. We need to find the right balance. More: http://bit.ly/nRWmD7
Here is AT&T’s response to Justice. http://www.freeourfreemarkets.org/2011/09/at-answer-to-justice.html
Josh, thanks for the in-depth analysis and responsive posts. Let me throw out another possibility on this one — Sprint didn’t want the future of this case riding on the results of the 2012 election. A Romney administration might drop this, no? That wouldn’t explain the alternative theory, but it would explain why they’d want to jump in.
Josh,
I think you overstate things here. First, the DOJ’s complaint is all about the “red meat.” Nothing precludes DOJ from making merger guidelines arguments down the road. Second, the so-called omission of exclusionary theories is a critical weakness, but not for DOJ. It’s a problem for Sprint. Sprint filed this lawsuit so it could stay in the game and not be subject to any backroom deals involving DOJ and FCC that might lead to Comcast/NBC conditions that are silly, at least as far as Sprint is concerned.
Baseball: looks like we have a different definition of “red meat.” The fact that the DOJ can argue something down the road certainly doesn’t preclude one from reading the theories they chose to put in the complaint (query: how often does an antitrust agency add a new theory post-complaint? Not too often I’m guessing). But besides that, I agree with the more political point you raise. The suit may change negotiating leverage and I think that is no doubt part of the story. Adding to that, the exclusionary theories allow one to make argument about special access and the like for remedies (which would not make sense under the pure unilateral or coordinated effects theories in the DOJ Complaint). I think having the exclusion theories on the table allows Sprint to go after those conditions.
Oh yes, Comcast. This is why we need to reform campaign law.
FCC allows Comcast to buy NBC.
“As is normal in media mergers, the F.C.C. imposed a long list of conditions on the deal. They were outlined in an F.C.C. news release on Tuesday. The conditions are intended to ensure that Comcast plays fair when dealing with rival programmers, cable providers and broadband Internet providers. Many of the conditions are intended to remain in place for seven years, an unusually long period of time.” New York Times, January 18, 2011
Our politicians just cannot resist big money from big business. Instead of protecting free markets, our politicians have allowed the beginning of the consolidation of the media industry. They have done it by hiding behind “stiff” regulations that will eventually be ignored as a new layer of government bureaucracy will need to be created to “enforce” new regulations.
This is how government gets out of hand and industries stop being free markets. And oh yeah, it is also how our politicians fill their campaign coffers.
Actually I was referring to DOJ’s silly conditions in Comcast. The FCC pretty much always imposes silly conditions in change of control situations. More so now than ever before. It’s a lot more “efficient” than a rulemaking! DOJ’s silly conditions are depressing since we had always assumed that DOJ was a more professional organization than the FCC, at least when it comes to merger review.
Josh, I meant “red meat” in the sense that they have a classic 4 to 3 to argue here without worrying about GUPPI or anything else. I can’t believe that DOJ wouldn’t use all manner of economic evidence and theory in the course of the proceedings, should it come to that. I wonder, though, if we will ever see this litigated regardless of who is elected in 2012.