Should the Government Allow Further Consolidation in the US Mobile Market?

[Commentary] Congress tasked the Federal Communications Commission with the difficult job of having to figure out both the big picture and small details of the auction process, including how many licenses to auction in any given market.

This number would, in part, determine the number of firms offering mobile wireless services (in addition to the two already in operation). On this question, former FCC Chairman Reed Hundt indicated he relied heavily on the advice of Professor Michael Porter at the Harvard Business School. The government, the Professor rightly reasoned, could not pick the equilibrium number of firms in advance.

To sum up, the advice from Professor Porter was to sell too many licenses and let consolidation move the industry to its equilibrium. In light of Chairman Hundt’s “overshoot the equilibrium plan,” I find the Obama Administration’s hard line and much of the current debate over the price-increasing effects of further consolidation misplaced.

In this strategy devised by Professor Porter and Chairman Hundt, even if we limit the argument solely to a price effect, permitting consolidation from a point known to be “too many” can still be good policy. Significantly, under the Hundt-Porter strategy, even if we know a merger will lead to higher prices, this knowledge is not a sufficient reason to block a merger. Higher prices was, in large part, the plan.