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The proposed merger of AT&T and T-Mobile: Are there unexhausted scale economies in U.S. mobile telephony?


  • Li, Yan
  • Pittman, Russell


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.

Suggested Citation

  • Li, Yan & Pittman, Russell, 2012. "The proposed merger of AT&T and T-Mobile: Are there unexhausted scale economies in U.S. mobile telephony?," MPRA Paper 39043, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:39043

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    References listed on IDEAS

    1. Gagnepain, Philippe & Pereira, Pedro, 2007. "Entry, costs reduction, and competition in the Portuguese mobile telephony industry," International Journal of Industrial Organization, Elsevier, vol. 25(3), pages 461-481, June.
    2. Chambers,Robert G., 1988. "Applied Production Analysis," Cambridge Books, Cambridge University Press, number 9780521314275, May.
    3. Alfred E. Kahn, 1988. "The Economics of Regulation: Principles and Institutions," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262610523, January.
    4. 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 147-157, September.
    5. 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.
    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.
    7. 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.
    8. Pittman, Russell, 2007. "Options for Restructuring the State-Owned Monopoly Railway," Research in Transportation Economics, Elsevier, vol. 20(1), pages 179-198, January.
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    More about this item


    merger efficiencies; economies of scale; economies of density; mobile telephony; antitrust; stochastic frontier analysis;

    JEL classification:

    • L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications
    • K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law
    • K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General

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