Two mega-firms — the third- and fourth-largest cellular communications companies— want to merge. Is it a good idea? Is it permissible?
In a free market economy, private companies own the means of production and control their use through voluntary decisions made in the marketplace. The government plays a small role, ideally serving as an economic promoter and preventer of abuses.
Two forces make the free market system work: self-interest and competition. Self-interest is a given. We are all motivated by the betterment of our lives. Self- interest is the primary motivator of economic activity. We go to school so we can get a better job someday and earn more money to buy the things we want. In fact, most of the economic activity we see around us is the result of self-interested behavior.
Adam Smith described this foundational drive in his epic book, “The Wealth of Nations”: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” Self-interest in generating revenue is not greedy; it is not evil; it is a truism is existence.
The role of competition is somewhat different. It is external to self-interest, but it was described by Smith over 200 years ago as foundational to the benefits of a free market economy. Unconstrained self-interest can easily and naturally lead to price gouging, corruption and cheating, but in a competitive market, it is held in check by the natural forces of competition. A producer must provide a high-quality good or service at a reasonable price.
But this assumes the producer has competitors keeping an eye on him. If there is no competition, the producer can charge a high price, sell inferior products, or ill-treat customers. Thus, competition is the regulator, a check on self-interest, because it restrains one’s ability to take advantage of the market. Such is the natural and magical “invisible hand” described by Adam Smith.
The discussion of self-interest and competition usually results in a discussion of the proper role of government regulation. Some see a market economy as largely self-regulating, assuming there are enough firms competing in the market to be a check on self-interest. Others point to examples of fraud where competition has failed to be an adequate check on self-interest; they argue that government must take a more active role in promoting competition in economic activity.
This conviction was the motivating force of Republican Sen. John Sherman of Ohio in sponsoring federal legislation to broadly outlaw combinations in restraint of trade, an act now called the Sherman Act. It was later augmented by a more specific law called the Clayton Act.
Attorneys general from 10 states have filed a lawsuit under principles enunciated in the Sherman and Clayton acts, seeking to block the merger of the cellphone mega- companies T-Mobile and Sprint. These third- and fourth-largest U.S. wireless phone service providers have been pursuing a deal to combine since April 2018. The deal has been under extensive federal regulatory review ever since, with approval required both from the Federal Communications Commission and the U.S. Department of Justice.
Sprint and T-Mobile believe that joining forces would give them the scale to better compete with industry leaders AT&T and Verizon. Critics of the merger argue that shrinking the field from four major players to three would reduce competitive intensity and lead to higher prices for consumers.
The deal secured the backing of the head of the Federal Communications Commission chairman last month. But the path to consummation is still in question. The Department of Justice antitrust division staff members reportedly recommended opposing the merger, and the state AG lawsuit is just beginning. The state AG complaint, filed in a federal court in New York, argues that the merger would cause consumer harm by making it easier for the carriers to collude in raising prices. They project a combined cost to Sprint and T-Mobile subscribers of over $4.5 billion a year.
Notwithstanding that the basic anti-trust laws were initiated by trust-busting President Teddy Roosevelt and championed by Sen. John Sherman, recent Republican administrations have not been exuberant in enforcing the anti-trust laws. George W. Bush advised The Economist prior to taking office that his administration would be laissez-faire on anti-trust and would prosecute only direct price fixing.
Anti-trust enforcement under Donald Trump has fallen to its slowest rate since the 1970s, according to figures compiled by the Financial Times. Fewer than 20 new cases were publicly filed by the Department of Justice in the most recent fiscal year, a level last seen in 1972, almost five decades ago.
So far, the White House has been silent on the Sprint-T Mobile merger.
Don Tortorice is a former attorney and professor at the Law School of the College of William and Mary.