Constitutional Crisis | December 10, 2011 at 12:59 pm

Trust Busting

By and

The Antitrust Division strikes back

“The combination of AT&T and T-Mobile would result in tens of millions of consumers…facing higher prices, fewer choices and lower quality products for mobile wireless services.” So declared Deputy Attorney General James Cole, bringing the Department of Justice (DOJ) into a national debate on government’s role in business. Previously, the Obama administration had proven relatively inactive in its enforcement of antitrust law. The DOJ’s challenge to the AT&T merger represents a shift from rhetoric to action, and among scholarly, legal, and political schools. Whatever the ultimate outcome, the dispute’s resolution will create precedent for future government interventions in the business sector.

The Boys From Chicago

For the past several decades, antitrust scholarship has largely based in the ideas of neoliberal, free- market thinkers at the University of Chicago during the 1970s. Reacting against Keynesian interventionist policies, economists like Milton Friedman and Robert Lucas argued against government involvement in trade, regulation, welfare, and antitrust policy. These ideas formed the bedrock for Reagan’s revolutionary economic policies, and influenced decisions well into the 21st century. Alan Greenspan, among others, would later use such arguments to advocate for the deregulation of the banking industry.

Chicago scholars believed that the central objective of legal systems should be to effectively allocate resources and maximize wealth. Accordingly, they argued, government should not break up trusts if the benefits of centralizing production outweigh monopoly costs. Reacting against the aggressive antitrust policy of the 1960s, Chicago legal scholar Richard Bork argued in The Antitrust Paradox that decisions in antitrust cases should be based solely on consumer welfare. This thinking fundamentally shifted antitrust legal norms post-1970s, and dominated much of America’s policymaking.

After the Crisis

Despite decades of its dominance, Chicago School thinking has faced recent challenges. After the housing market collapsed in 2007, many began to doubt that markets were fundamentally rational. Joseph Stiglitz, a Columbia economics professor, said in 2009, “The Chicago School bears the blame for providing a seeming intellectual foundation for the idea that markets are self-adjusting and the best role for government is to do nothing.”

Despite the recent shift of antitrust scholarship and increased political support for regulatory solutions, the DOJ under Obama has not actively enforced antitrust law. One antitrust attorney told the HPR that many progressives hoped that the Obama administration would “turn a corner” on antitrust policy, ending an era of relatively unconditional approvals of mergers. While campaigning, Obama had promised to appoint an Antitrust Division head that “actually believes in antitrust law.” Since 2008, however, Justice adopted a hands- off approach, and the Antitrust Division currently stands leaderless.

Additionally, many outsiders questioned the DOJ’s decision not to challenge United Airlines’ merger with Continental. Even though experts anticipated an increase in fares and the Government Accountability Office concluded that less competition would occur, the DOJ did not take legal action. Instead, hoping to avoid a lengthy litigation process, the parties settled out of court, and United transferred 36 takeoff and landing slots to its competitor Southwest. F.M. Scherer, a Harvard Kennedy School antitrust law professor, maintains that such concessions have become “standard negotiating practice in these kinds of deals.” Indeed, when Live Nation and Ticketmaster merged in 2010, the DOJ forced the companies to spin off some of their subsidiaries as independent competitors as a condition for approval.

Why AT&T?

The DOJ thus surprised observers by blocking the AT&T and T-Mobile merger, halting preparations to combine the two networks. Observers have pointed to T-Mobile’s reputation as a maverick in the mobile industry as a possible explanation for the decision. Andrew Schwartzmann, who leads the Media Access Project, a consumer group opposed to the merger, told the HPR that the DOJ believes that “the impact of the merger on prices and handsets available will be larger than one would expect. Because it’s T-Mobile, it gives it special status.” Further, T-Mobile is known for promoting “disruptive pricing” plans. The DOJ even cited T-Mobile’s role as a “challenger brand” in its briefs against the merger.

AT&T nonetheless counters that the merger would expand broadband coverage to 97 percent of Americans. Experts like Larry Downes, consultant and author of The Laws of Disruption, support AT&T’s assertions. Downes argues, “Given the regulatory hurdles carriers face in building cell towers and acquiring spectrum, mergers are the most effective way mobile providers can expand their service to keep up with exploding demand for new services and more data traffic.” However, an embarrassing leak has hurt AT&T’s messaging. An internal AT&T report accidentally posted on the Federal Communications Commission’s website concluded that the company could achieve the same broadband expansions by spending less than $4 billion on its own network, one-tenth of the acquisition cost for T-Mobile.

The large size of the companies’ market share also likely impacted the decision. AT&T has argued that local low-cost carriers are increasingly the main competition for national carriers in regional markets. Justice disagreed and instead highlighted that a post-merger world would see Sprint, Verizon, and AT&T control 90 percent of cellular customers. T-Mobile and AT&T compete directly in 97 of the top 100 cellular markets, whereas in comparison, United and Continental only control a combined 18 percent of the airline market.

Political Effects

Unexpectedly, both right and left wing figures have criticized the Justice’s action. Elements of the Tea Party, ideological successors to the Chicago School, have declared their support for the merger. Senator Mike Lee (R-UT), ranking member of the Senate Subcommittee on Antitrust, Competition Policy and Consumer Rights, has written to the FCC to expedite approval.

Organized labor, integral to the Obama coalition, has also supported the merger, arguing that it would slow or reverse outsourcing in the telecommunications industry. “The DOJ’s action would put good jobs and workers’ rights at the bottom of the government’s priorities,” Communications Workers of America President Larry Cohen declared. “Instead of acting to block this merger, our government should be looking to support companies that create, keep and return good jobs to the United States.” Though Obama cannot intervene in the case, pushing public opinion against the merger could bring him into conflict with a key constituency.

Possible Resolutions

The decision on the AT&T case has major implications, both politically and ideologically. Some observers think a settlement will occur, but Schwartzmann argues “reading the Justice Department’s brief, it’s difficult to reconcile that with negotiations.” A court victory against AT&T could push the Obama Administration towards a more active anti-trust policy, while losing would weaken the DOJ’s leverage in future mergers. Final resolution, whether via the courts or negotiated settlement, will offer important answers about the government’s relationship with business.

Eric Hendey ‘14 is the Webmaster. Jake Silberg ‘15 is a Contributing Writer.

Photo Credit: John Morgan, Flickr

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