Carl Sacklen     Blog     Freelance Portfolio

A Murky Merger

The AT&T Merger with Time Warner Points to a Bigger Problem in the US Economy.

Politicians on both sides of the house, including Bernie Sanders and Tim Kaine, have come out against the merger, which was officially announced on Saturday. The CEO of AT&T has dismissed the merger as vertical integration to quell rumours of a horizontal integration, which would reduce market competition. Sens. Mike Lee, R-Utah, and Amy Klobuchar, D-Minn. - who chair the Senate’s anti-trust subcommittee - aren’t too sure, and have promised to hold hearings on the issue. The concern with horizontal integration – that is, the merger of two similar companies like BMW and Nissan – is that it can have dire effects on the competitiveness of a market. This is particularly concerning in a market like US telecom, where 75% of the market share is already occupied by two firms, one being AT&T and the other Verizon.

The merger points to a bigger issue however, which is the US economy – the supposed pinnacle of capitalism – and its slow but steady move towards domination by a few large firms. This can have serious consequences for competitiveness and hence what customers are made to pay. This in turn suggests a stagnating economy that has many economists believing the US economy is becoming less and less competitive. The number of large firms in the US has doubled whilst small companies have only increased by 50%. Since new companies tend to be small ones, this slow-down suggests a decline in entrepreneurship in the US economy. This is backed up by the fact that 68% of American workers are employed by a firm that is 20 years or older whilst, according to the US Census Bureau, the start-up rate has been in decline for the past three decades. Data: US Census Bureau / Graphic: FiveThirtyEight Data: US Census Bureau / Graphic: FiveThirtyEight

The number of large firms surviving has increased whilst the number of successful start-ups has fallen. This has resulted in the market share slowly being transferred to a handful of firms and a steady monopolisation, or at least oligopolisation, within certain industries.

A monopoly is the ability for a firm to raise prices without losing customers. Of course, the customer can choose not to buy the product in question, but that hardly seems a viable option in the telecom industry. This rise in price however, can of course lead to greater innovation and potentially greater allocative and dynamic efficiency in the long-run. Apple is a perfect example of market dominance being used for modernisation. Moreover, a merger can lead to greater efficiency because of a phenomenon economists call “economies of scale” which means firms are able to produce at a lower cost per unit. Research, however, has shown that recent mergers have not increased efficiency, but have instead resulted in greater market power and hence ability for firms to hike prices. Attempts to force out competitors from a market through merging (as Verizon did with AOL) and AT&T is proposing with Time Warner, are big firms trying to extend their sphere of influence; this is not good news for the consumer or the state of the economy in general since new businesses are essential in promoting innovation and growth: whilst they only account for 2% of US employment, they play a huge role in job creation.

Politicians and economists alike need to be wary of corporate dominance. Too much freedom for big business, whilst we shouldn’t penalise success, can damage the entrepreneurial spirit that built America, and will almost certainly stunt its economic growth.