By: Matt Stoller (Big)
Today I’m writing about how the Trump administration, in allowing a merger between T-Mobile and Sprint, ended up causing inflation in cell phone prices. Fortunately, because of some savvy class action lawyers and useful recent precedent, this story may have a happy ending.
Plus, for anti-monopolists in the broader Anglo world, I have a few words on (1) Canadian movie theater monopolist Cineplex and (2) price hikes and market power in the UK.
A Four to Three Merger
Last Friday, the Wall Street Journal’s Drew Fitzgerald wrote a good story about how inflation is driving up the prices that don’t seem related to oil or commodity price spikes, like wireless communication. “Wireless companies have spent the past month boosting fees and raising the cost of some midrange wireless plans,” wrote Fitzgerald. “Industry executives say that consumers already numbed to surging prices for other necessities might absorb slightly higher rates instead of switching providers or dropping service.”
Here are some of the increases.
- AT&T raised the cost of its older wireless plan “by up to $6 for single lines and $12 for family plans.”
- Verizon raised prices by either $6 or $12 a month on some of its data plans, and slapped a monthly per-smartphone fee of $2.20 on business plans, and raised consumer wireless plans by $1.25 a month.
- T-Mobile raised fees on older plans by 31 cents/month, and its activation and support fees by $5.
Missing from the story is why these prices are going up. From 2014-2019, cell phone prices had been going down, consistent with what happens in many high tech markets where technology is improving rapidly. There’s no obvious reason for that to have changed. Costs for materials and labor are up a bit, but not enough to substantially dent profit margins in a market largely based on already installed fixed communications equipment. (Plus prices started going up in 2020, before the current bout of broader inflation.) So what happened?
In 2019, there were four major carriers in the market for cell phones. Today, there are just three. And the reason is that the third largest cell phone provider, T-Mobile, was able to buy the fourth biggest, Sprint. In doing so, it ended a price war that had been lowering prices for consumers for six years.
This merger had been a long time coming. For years, T-Mobile, with its magenta clothed CEO John Legere flamboyantly calling itself the ‘Un-carrier,’ had been annoying the industry with its strategy of lowering prices to acquire consumers. It was what is known in economics as a ‘maverick’ firm, pursuing an unusual strategy that forced the whole industry to adapt and become less profitable.
In 2011, AT&T sought to put an end to this maverick strategy by offering to buy T-Mobile. Fortunately, the Obama administration, though generally weak on antitrust, blocked the merger, because antitrust officials, as well as then-FCC Chair Tom Wheeler, believed that a concentrated wireless market with four firms should not be allowed to consolidate further. From 2014 onward, because wireless competition continued, cell phone prices dropped by 6.3% annually…