The Effects of Mergers on Markets
One of the challenges with dealing with markets that are dominated by an oligopoly relates to how they can be handled. As a result of the complexity of oligopoly, which is in turn brought about by the mutual interdependence it breeds among firms, no single, generally-accepted economic theory can sufficiently explain the market model (Mankiw, 2015). The problem arises out of the tendency by markets under the oligopoly model not to behave in the same way, something firms under other market models do. For most economists, though, their problem with oligopolies arise out of the difficulty they pose in achieving either productive or allocative efficiency. Before one can contemplate these issues, though, they have to ascertain that an oligopoly actually exists.
One of the ways that firms can understand the market model and tell if an oligopoly exists is through analyzing the concentration ratio. The concentration ratio refers to the percentage of sales accounted for by a specific number of top firms in a market or industry. Typically, the concentration ratio can be a four-firm, which analyzes the top four firms, eight-firm, which correspondingly analyzes the top eight firms, or twenty-firms, which analyzes the top twenty firms (Samuelson & Marks, 2012). Most commonly, though, the four-firm concentration ratio is used. In the case of the AT & T and T-Mobile merger, an analysis of the market reveals that if the two firms were to merge, the new entity would control a total of 38.8 percent of the market, 26.6 percent coming from AT & T and 12.2 percent coming from T-Mobile’s share. The merger would have an even greater impact on the concentration ratio. The four-firm concentration ratio would increase from 82 to 87 percent. What this would mean is that there would be a higher market concentration ratio, which implies that a small number of firms will have dominance and a greater degree of control over the market (Samuelson & Marks, 2012). Curiously, even if the merger was between TracPhone, the market will face the same challenges since the four-firm concentration would still be 87 percent.
An alternative way to measure how much of a market is dominated by a small number of firms is to use the Herfindahl-Hirschman Index (HHI), which calculated market dominance by summing up the square of the market share of all firms. Antitrust guidelines require that merger requests in moderately concentrated markets, where the HHI falls between 1,500 and 2,500, are denied automatically if they would result in an HHI increase of more than 100 points. The mobile telephony market, before the potential merger, had a Herfindahl-Hirschman Index of 2021.6 points. Unlike the concentration ratio, the HHI index accounts for the market shares of all firms (Samuelson & Marks, 2012). However, since it involves squaring market shares, the more unequal the difference in values between a collection of firms, the greater the index would be. If the merger had gone through, the HHI would become 2816.6, a difference of close to 800 points. The effect of the merger on the Herfindahl-Hirschman Index means that the merger would not have gone through on the basis of the fact that it violates antitrust guidelines. If the two companies had managed the merger, it is true that AT & T might have been able to provide a more reliable and faster cellphone service to its customers. However, the potential risk, including an increase in cellular rates would be a foregone conclusion because of the firm’s newly-established market dominance.
Mankiw, N. G. (2015). Principles of economics (Seventh edition). Stamford, CT: Cengage Learning.
Samuelson, W., & Marks, S. G. (2012). Managerial Economics (7th ed). Hoboken, N.J: Wiley.
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