When Roosevelt made his keynote speech to the Democratic national convention in 1936, he voiced the public’s fear of monopoly power: he called it “industrial dictatorship” and argued that Americans were “no longer free”. A lawyer, Thurman Arnold, appointed to enforce antitrust laws, argued that concentration was “a tax on the public and a threat to democracy”. For more than 50 years afterwards, the US Justice Department enforced its laws vigorously, with enthusiastic public support for government intervention.
Without the break-up of AT&T in 1982, most of the recent history of telecoms would have been different. Elsewhere, as more state-owned firms were privatised, their market power was also checked.
But a combination of rapid technological innovation, falling prices and clever lobbying has achieved widespread indifference to concentration among the public. Which is progress, if you have price-setting power over those consumers and you don’t want regulators poking around in your accounts.
If you want to merge, you need to convince lawyers and economists that more concentration is in the public interest, which is a higher bar – not least because there’s a lot of evidence, historical and recent, that customers pay higher prices and benefit less from innovation.
In a recent paper, “Concentrating on the Fall of the Labor Share”, David Autor, David Dorn, Lawrence F. Katz, Christina Patterson and John Van Reenen also show that when monopolies are more powerful, workers receive a lower share of the national income. Now there’s tentative evidence for a counter-argument. This is because firms in all types of technology-enabled markets benefit from what economists call network effects. The argument is that, if their platform is useful, the service or technology a provider or operator offers becomes a de facto standard platform, and can rapidly dominate a market.
In that case, monopoly may help consumers – powerful companies become dominant precisely because they are the best option, and this dominance is useful in itself. When it is dominant, the provider of the service actually has more incentive to innovate because new services will have a better return. The traditional argument, that market power causes less innovation, and monopolies are bad for consumers and good for large companies that have run out of ideas, is stood on its head.
New research into telecoms mergers by Christos Genakos, Tommaso Valletti and Frank Verboven in Europe disentangle the effects (there’s a readable summary at http://bit.ly/capaconc).
They note that the EU’s competition regulators are becoming more relaxed about concentration: Netherlands, Austria, Ireland, and Germany have cleared regulatory hurdles in four-to-three consolidation, although similar mergers in the UK and Denmark were blocked.
The paper studies the relationship between bills paid by high, medium and low users, capex and indices of concentration in Europe between 2002 and 2014. With 12 years of data, they can see the effect of mergers, entry and exit, and new licensing in European telecoms, and use statistical techniques to work out what is causing what.
There’s support for both pro- and anti- arguments about market power. Big mergers increase prices (going from four competitors to three increases bill by 16.3% on average), but investment per operator also goes up, by 19.3%. Among smaller firms that merge, the figures are 4-7% and 7.5-14% respectively.
Operators would invest more only if there’s a reason to do so, and so we can assume that these investments occurred because there were efficiencies from concentration in telecoms. We don’t know from this data which of these efficiencies were the type that benefited customers, and which were just a reduction in fixed cost that mostly benefited shareholders – tower sharing, for example.
But, at the very least, this is an argument to look again at the defence to antitrust cases in telecoms. The initial cost to consumers of concentration, which is assumed to be the dominant economic impact for customers, may be the first chapter of a much bigger story. It is possible that both shareholders and public benefit in the long run.
There has previously been little hard statistical evidence of the consumer benefits of concentration, so this is an argument that isn’t presented seriously to today’s regulators – though it’s often airily claimed in a handwaving way in the press releases. It’s a brave operator that will claim that more “industrial dictatorship” might be good. But, if future research backs this evidence, there’s a brighter regulatory future for firms that really want to get bigger.
