What would be the effect of the merger on the market’s concentration ratio? On the HHI?
The market's concentration ratio points at the market share of the four or the eight biggest companies in a particular market. The United States share market was composed of AT&T, T-Mobile, Verizon, Sprint, and TracFone. The following are the calculations of the market concentration ratio.
AT&T=26.6%, T-Mobile =12.2%. Verizon=31.3%, Sprint=11.9%, TracFone=5.0%.
Therefore, the market concentration ratio was as follows.
Market concentration ratio= (26.6+12.2) %+31.3%+11.9%+5.0%
Market concentration ratio=87%
A market concentration ratio above 80% suggests that the market concentration structure of the United States of America's cell phone service providers is between oligopoly and monopoly. Without the merger, the market concentration ratio would be less than 87% and more oligopolistic. Therefore, the merger between AT&T and T-Mobile leads to a rise in the monopolistic nature of the market.
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Mergers and acquisitions also affect the Herfindahl-Hirschman Index (HHI). The HHI indicates the size of the business ventures concerning the sectors under which they are classified. The HHI also shows the level of competition among the given companies. The following is the HHI calculations for the service providers in the United States of America.
HHI= f 1 2 +f 2 2 +f 3 2 +…...f n 2
HHI= (26.62+12.22) +31.32+11.92+5.02+3.12+2.32+1.62
HHI=707.56+148.84+979.69+141.61+25.00+9.61+5.29+2.56
HHI= 2020.16
The HHI for the United States service providers market lies in the bracket that suggests there is moderate concentration. Therefore, the merger between AT&T and T-Mobile will reduce the concentration of the service providers in the market in the United States of America.
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 points. How would this rule apply to the AT&T merger with T-Mobile? How would it apply to a hypothetical merger between T-Mobile and TracFone?
In the merger between AT&T and T-Mobile, the HHI is given as follows.
Before the merger;
HHI= (26.62+12.22) +31.32+11.92+5.02+3.12+2.32+1.62
HHI=707.56+148.84+979.69+141.61+25.00+9.61+5.29+2.56
HHI= 2020.16
After the merger;
HHI= (26.6+12.2)2+31.32+11.92+5.02+3.12+2.32+1.62
HHI=38.82+31.32+11.92+5.02+3.12+2.32+1.62
HHI= 2669.20
Resultant HHI increase= 2669.20-2020.16
Increase= 649.04.
The HHI value of 2020.16 before the merger of AT&T and T-Mobile suggests that the market is moderately concentrated. After the merger, the value increases to 2669.20, which indicates that the market will become more focused after the acquisition. The resultant HHI is above 200. That suggests that the merger is past the guidelines regarding the threshold of the market concentration surrounding a merger. Therefore, the merger between AT&T and T-Mobile is not allowed to take place.
If T-Mobile and TracFone were to merge, the following would be the calculations for the HHI values and the increases in such values.
Before the merger;
HHI= 26.62+12.22+31.32+11.92+5.02+3.12+2.32+1.62
HHI=707.56+148.84+979.69+141.61+25.00+9.61+5.29+2.56
HHI= 2020.16
After the merger;
HHI= (26.6+5.0)2+12.22+31.32+11.92+3.12+2.32+1.62
HHI=31.62+12.22+31.32+11.92+3.12+2.32+1.62
HHI=2286.16
Increase in the HHI value=2286.16-2020.16
Increase=266
The concentration of the market before and after the merger between T-Mobile and TracFone was moderate. The increase of the HHI value during the merger is above 200. That is to say, that the merger would cause significant concern for the antitrust guidelines that would lead to the stoppage of the merger between the two companies.
AT&T argued that the merger would extend its network, providing more reliable and faster cell phone service (mainly to existing T-Mobile customers who on average have lower-grade service plans at cheaper rates). Market observers were worried that after the merger, AT&T would raise cellular rates to some customer segments. Briefly evaluate these pros and cons.
The pros of the merger would be that AT&T would have better investment platforms. The market share of AT&T combined with that of T-Mobile would lead to a more significant market share in the United States of America’s cellular service industry. That would lead to the merged companies being better suited for competition in the market as compared to the lack of a merger between the two service providers (Medudula, Sagar & Gandhi, 2016). Secondly, the quality of service at AT&T would have a facelift in the quality of services that it provides to its customers across the United States of America. That would be because of the joint efforts to transform the customer service operations in the merger (GSM Association, 2015).
The cons of the merger are that the cellular rates would go high after some time. Due to the different customer segments and mobile phone prices that both AT&T and T-Mobile have, it would be difficult for them to establish a standard price rate for the cellular services in the country (Evens & Donders, 2018). Summatively, the data connection provided by the companies would be faster than it was before, but then consume more money from the consumer's perspective than it was before the merger (Qiu, Rui & Whinston, 2015).
References
Evens, T., & Donders, K. (2018). Policing the Platforms. In Platform Power and Policy in Transforming Television Markets (pp. 201-242). Palgrave Macmillan, Cham.
GSM Association. (2015). New GSMA report highlights benefits of mobile mergers– Newsroom . Retrieved from https://www.gsma.com/newsroom/press-release/gsma-report-highlights- benefits-of-mobile-mergers/
Medudula, M. K., Sagar, M., & Gandhi, R. P. (2016). Mobile Virtual Network Operators (MVNOs): An Emerging Business Model. In Telecom Management in Emerging Economies (pp. 99-118). Springer, New Delhi.
Qiu, L., Rui, H., & Whinston, A. (2015, January). When cellular capacity meets wifi hotspots: A Smart auction system for mobile data offloading. In System Sciences (HICSS), 2015 48th Hawaii International Conference on (pp. 4898-4907). IEEE.
