Telecommunications moves closer to Duopoly: Critique

Most mobile phone users are anxious about how the T-mobile/AT&T merger will play out. Many customers fear the lost of competition in the market will drive up prices. There are a number of sources that confirm this point of view. These sources also claim the price of wireless service has fallen during the last decade, but the ARPU (average revenue per user) is increasing. In essence, telecommunication firms are earning more due to the increased popularity of smartphones and it is likely phone service will cost more in the future.
However, there may be some positive outcomes from this merger. This critique explores possible benefits that could come out of an imperfect wireless market. Our textbook tells us imperfect competition is bad for the average consumer because firms can charge high prices and produce low outputs. Imperfect competition also prevents firms from entering the market. Thus, consumers are forced to buy from a select group of competing firms. After the merger, two large firms (AT&T and Verizon) will have almost complete control over the market. Those without a wireless provider will lose out because they will have to pay more for a new contract. On the other hand, both AT&T and T-mobile customers may see improved quality as a result of the merger. For example, if you are an AT&T costumer who lives in New York City, you will experience better service once the two firms merge. Lately, AT&T has struggled to keep up with the high demand in urban areas. Once the merger is finalized, AT&T users will be able to access T-mobile’s brand new backhaul network. This means faster internet connections and fewer dropped calls for both AT&T and T-mobile customers. Yes, the price of wireless service will go up, but the quality will improve as well.
Secondly, sources indicate that AT&T and Verizon will take part in a duopoly price game after the merger. In other words, both firms will constantly find ways to undercut each other. Our textbook (Economics19e) describes this phenomenon in detail on page 196. In a duopoly price game, each firm must decide weather to charge the normal price or lower price below marginal costs. A lower price will decrease a firm’s profits, but it will also work to throw the competing firm into bankruptcy. It is unlikely AT&T or Verizon will go bankrupt from a duopoly price war any time soon. Still, the merger is not entirely a bad thing. Some AT&T customers would prefer to pay more for better service.
Sources:
Samuelson, Paul A. & Nordhaus, William. 2010. Economics19e. The McGraw-Hill Companies: New York, NY

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