It is often said that timing is everything.
And if that’s the case, than AT&T(T) CEO Randall L. Stephenson may just end up with nothing in his $85.4 billion attempt to takeover the cable-content giant Time Warner (TWX).
That’s because the deal was announced amidst a presidential election in which both candidates—motivated by a growing suspicion of big business—have been touting their populist fundamentals.
The candidate that Republicans (typically the party that is suspicious of antitrust regulation) nominated, Donald Trump, has already pledged to block the deal if he’s elected president. Meanwhile Democrats and the left in general have been increasingly making noise about using antitrust law as a tool for confronting economic inequality and the concentration of corporate power.
And critics of business concentration have at their disposal recent economic research that suggests that we should expect a much more skeptical Justice Department and Federal Trade Commission in any case.
John Kwoka, an economist at Northeastern University, recently published research that looked at more than 1,000 mergers over the past twenty years. Kwoka found that at least one-third of the ones he studied actually resulted in price increases of more than 10%, when controlling for factors like changes in input costs, shifts in demand, and other variables that can lead to price increases outside of changes in the competitive landscape. Kwoka found that a whopping 80% of mergers led to some price increase, with the average coming in at 7%.
Kwoka’s research is a damning indictment of the federal government’s performance in preventing price-increasing mergers, and could be used as justification in and of itself to crack down on mergers and acquisitions. Kwoka also found that when the federal government requires merging companies to divest assets, such actions had almost no effect in preventing price increases.
He also found that the approach of using “conduct remedies,” or requirements that firms act against their own interests in order to promote more competition, were wholly inadequate to prevent consumer harm through rising prices. These remedies, according to Kwoka, “are difficult to write, difficult to enforce, and at the end of the day they don’t work.”
And they lead to huge price increases for consumers, anyway. According to Kwoka’s research, mergers that relied on conduct remedies to prevent consumer harm actually led to, on average, a 16% increase in prices, more than twice as large an increase as the average merger.
There’s an important caveat to consider. Kwoka’s research focuses on “horizontal” mergers, whereby two companies competing in the same market join together. The proposed AT&T and Time Warner deal would be a vertical integration, whereby firms in different parts of the supply chain merge together. Standard theory dictates that because these sorts of mergers don’t reduce competition. In theory, the existence of the same number of competitors in the market at the end of the supply chain will stop firms from raising the prices consumers pay.
But a vertical merger can lead to price increases in certain instances. The market for internet service is notoriously bereft of competition, because of incredibly high barriers to entry. “Within five months of completing its $49 billion purchase of DirecTV, AT&T announced that it would increase prices for its broadband service,” according to the Center for Public Integrity. “DirecTV also announced that month that it would hike its prices.”
Cable and Internet providers are constrained from raising prices because all else equal, content providers want to get their product to consumers at the lowest price possible. When content creators and distributors are unified in markets where competition is already constrained, that can lead to price increases.
And while the Justice Department has largely relied on conduct remedies to amend vertical mergers, Kwoka’s research, and common sense, show why these solutions may not actually be solutions to price increases at all. “The remedy strategy that was pursued in Comcast-NBCUniversal was not effective,” Kwoka says. “Most anybody upon reading the agreement would say that this couldn’t possibly work. A number of people said it at the time.”
The only other method that the Feds have to prevent price increases is to block a merger. And one can expect, now that it’s clear that the tools that the government has been using has failed, that many in the administration, or the next one, will be arguing to do just that.
