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The Proposed Merger of AT&T and T-Mobile: Are There Unexhausted Scale Economies in U.S. Mobile Telephony?

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  • Russell Pittman

    (Economic Analysis Group, Antitrust Division, U.S. Department of Justice)

Abstract

From the beginning, the debate on the likely results of the proposed acquisition of T-Mobile USA by AT&T focused more on the claims of the parties that “immense” merger efficiencies would overwhelm any apparent losses of competition than on the presence or absence of those losses, and the factors that might affect them, such as market definition. The companies based their “economic model” of the merger on estimates of efficiencies on AT&T’s “engineering model”, without addressing the credibility of the results of the latter in the context of the economics literature on the telecommunications sector. In this paper we first argue that the economics literature on economies of scale (especially) and economies of density in mobile telephony suggests caution in expecting such massive cost reductions from increasing the size of an already very large firm. We then present new econometric evidence from an international data base supporting the notion that most large mobile telephone service providers have reached the point of constant or even (rarely) declining returns to scale.

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Bibliographic Info

Paper provided by Department of Justice, Antitrust Division in its series EAG Discussions Papers with number 201202.

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Length: 28 pages
Date of creation: Apr 2012
Date of revision:
Handle: RePEc:doj:eagpap:201202

Contact details of provider:
Postal: Department of Justice Antitrust Division 450 Fifth Street NW Washington, DC 20530
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Web page: http://www.justice.gov/atr/
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  1. R. D. Banker & A. Charnes & W. W. Cooper, 1984. "Some Models for Estimating Technical and Scale Inefficiencies in Data Envelopment Analysis," Management Science, INFORMS, vol. 30(9), pages 1078-1092, September.
  2. Philippe Gagnepain & Pedro Pereira, 2007. "Entry, Costs Reduction, and Competition in the Portuguese Mobile Telephony Industry," Post-Print hal-00622837, HAL.
  3. McKenzie, David J & Small, John P, 1997. "Econometric Cost Structure Estimates for Cellular Telephony in the United States," Journal of Regulatory Economics, Springer, vol. 12(2), pages 147-57, September.
  4. Pittman, Russell, 2007. "Options for Restructuring the State-Owned Monopoly Railway," Research in Transportation Economics, Elsevier, vol. 20(1), pages 179-198, January.
  5. Greene, William, 2005. "Reconsidering heterogeneity in panel data estimators of the stochastic frontier model," Journal of Econometrics, Elsevier, vol. 126(2), pages 269-303, June.
  6. Douglas W. Caves & Laurits R. Christensen & Michael W. Tretheway, 1984. "Economies of Density versus Economies of Scale: Why Trunk and Local Service Airline Costs Differ," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 471-489, Winter.
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