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Friday, August 16, 2019

35 Years Later, Antitrust Lawyers Are Making the Same Ma Bell Mistake

Last month the Department of Justice agreed to allow Sprint and T-Mobile to merge—under a few conditions.

Photo by Meghan Schiereck on Unsplash

“The lawyer with the briefcase can steal more money than the man with the gun.” – Vito Corleone, The Godfather

It was recently announced that Dish Network may purchase Boost from Sprint and Virgin Mobile from T-Mobile. Like in The Godfather, this is an offer Sprint and T-Mobile can’t refuse. Sprint and T-Mobile, the third-and fourth-largest cell phone service providers respectively, have been trying to merge for a long time.

Regulating Monopolies

Last month, the Department of Justice agreed to allow the companies to merge under a few conditions. Sprint will be forced to sell its popular Boost Mobile and Virgin Mobile brands to Dish Network for $5 billion, effectively creating a new fourth wireless network. Additionally, the new company must invest in building its new 5G network in rural areas throughout the country.

The DOJ called for these terms over fears that the cell phone industry is attempting to monopolize. Monopoly, besides being a super fun board game, is a market situation that involves a producer (or producers) controlling the supply of a good or service to such an extent that, in theory, it prohibits new producers from entering the market. Anti-trust proponents argue that when a company has this much power, it can charge whatever it wants and force consumers to pay that price for their good or service.

This ideal telephone market, however, never came to fruition.

This thinking was what spurred Congress in 1890 to pass the Sherman Anti-Trust Act, which effectively created a new branch of law called anti-trust law. One of the primary facets of anti-trust law is the government mandating that large corporations be broken up to enhance competition.

The telecommunications industry has a long history of regulation and government intervention through anti-trust laws. This was most dramatically seen in early 1982 when the federal government and AT&T reached an agreement that “Ma Bell”—the colloquial term for the Bell System—would spin off its local telephone operating companies into separate entities and only be allowed to offer long-distance service in an effort to promote greater competition and lower the average price of telephone service.

This decision was lauded by economists, politicians, the general public, and even by one writer here at FEE. This ideal telephone market, however, never came to fruition. A 1987 article in the Brookings Institution Press explained that,

…in the five years since the announcement of the AT&T settlement, telephone rates have risen sharply relative to general inflation. After falling continually for more than 20 years, the real cost of telephone service has actually gone up about 15 percent since announcement of the divestiture.

Anti-Trust Regulation

What happened? Why did the price of telephone service actually rise despite the best efforts of anti-trust lawyers? Former solicitor general and one-time Supreme Court nominee Robert Bork explained this phenomenon in his influential book The Antitrust Paradox. Bork explains that anti-trust legislation actually hurts the consumer more often than it helps. This is because newly-formed large companies have the opportunity to take advantage of economies of scale. This is when companies are able to produce products more efficiently because of their size. This is how companies like Amazon and Walmart are able to have lower prices than their smaller competitors.

Regulators, lawmakers, and the American public in general fear the formation of monopolies. However, monopolies very rarely form unless they are created by a governing body. American anti-trust laws are borne out of good intentions. However, history has shown that more often than not, it does more harm than good.Monopolies that form on their own have an incentive to innovate to keep their products cheaper and higher quality, else the market will have an incentive to provide an alternative product, as it invariably does. This was seen relatively recently.

Many considered Blackberry to have monopolized the smartphone market. This monopoly did not last long, however, as Apple and Google stepped in to create better smartphones for consumers. Markets have always had the incentive to create better alternatives for expensive products. There are already possible alternatives to traditional cell phone services emerging, such as WiFi, Apple Facetime, Facebook Messenger, WhatsApp, and others.

Nobel Prize-winning economist Milton Friedman once quipped, “Concentrated power is not rendered harmless by the good intentions of those who create it.”

American anti-trust laws are borne out of good intentions. However, history has shown that more often than not, it does more harm than good. There is no reason to believe that the Sprint-T-Mobile case will be any different.

  • Courtland Culver was a summer intern at FEE. Courtland is a recent graduate of the Florida State University where he received his Bachelor of Science Degree in Economics.