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 of $39 billion. 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, US 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 acquisition on the market’s concentration ratio? On the 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 to 200 points. How would this rule apply to the AT&T merger with T-Mobile? (How would the rule apply to a hypothetical merger between T-Mobile and TracFone?)
c. AT&T has argued that the merger will extend its network, providing more reliable and faster cell phone service (particularly to existing TMobile customers who on average have lower-grade service plans at cheaper rates). Market observers are worried that after the merger, AT&T is likely to raise cellular rates to some customer segments. Briefly evaluate these pros and cons.