Award Winning Blog

Thursday, August 29, 2013

The Dubious Rule of Three

            Some economists have asserted that markets can remain competitive even when mergers and consolidation reduces the number of major players to three.  Advocates for DOJ and FCC approval of the AT&T-TMobile merger invoked this “Rule.” I have expressed misgivings about economists establishing rules and treating them as unimpeachable.  Is three the optimal number that balances efficiency and scale on one hand and the potential for noncompetitiveness and consumer harm on the other hand?

            Perhaps three ventures can continue to compete robustly, particularly if one of the three refrains from the clear incentives to match prices and go easy on innovation.  AT&T and Verizon may compete on advertising, yet they seem to refrain from aggressive pricing.  Have you ever seen a wireless service sale?  From my perspective if AT&T had acquired TMobile consumers would suffer as the remaining Big Three would control about 90% of the market and have even less incentives to deviate from the profit maximizing consensus on rates, terms, and conditions for both handset and service.

            Now that TMobile has to stay in the marketplace the company has embraced the role of maverick and refused to go along with the consensus, a practice antitrust economists term “conscious parallelism.”  TMobile actually competes with the Big Two by offering lower prices, particularly for consumers who bring their own device (“BYOD”) thereby eliminating the need for a carrier subsidy.  The company offers lower rates—not just month-to-month service for BYOD subscribers.  In doing so TMobile has generated some clarity on the actual cost of those “free” handsets. 

            Consumers now have a choice between paying higher monthly rates for a two year term to pay handsomely for a subsidized handset, or to buy/lease the handset so that the monthly service rate drops, because it only covers wireless service.  That’s what I call competition, something that would not have occurred if the Rule of Three had applied.