The Natural Forces of Market Concentration

Country	HHI Index, 2009
China	6,772
Portugal	5,843
Switzerland	4,296
South Africa	4,152
Turkey	4,076
Japan	3,591
Spain	3,401
United Kingdom	3,401
Russia	3,383
France	3,346
US - Proposed	3,320
Canada	3,247
Italy	3,243
Israel	3,115
Germany	2,936
Australia	2,853
Taiwan	2,801
US - Now	2,744
Argentina	2,499
Brazil	2,396
India	1,614

NEW YORK TIMES -- "The [AT&T-T-Mobile] merger would increase the concentration of the cellular industry in the United States to 3,320, by the Herfindahl-Hirschman Index (HHI, a measure of market concentration), up from 2,744 before (see chart above). But note that even if AT&T does not acquire T-Mobile, the American wireless market is and will remain highly concentrated. An international comparison of market concentration, published this week by the Columbia Institute for Tele-Information, shows that the wireless markets in most nations are highly concentrated. 

In fact, the merger would move the United States from “toward the bottom to well in the middle of the pack” in terms of consolidated market power in the wireless industry, said Eli Noam, an economist at the Columbia University Business School and director of the telecommunications research institute (see chart above).

In telecommunications, the market concentration itself is not surprising. The telephone business, after all, has long been one of the classic examples of an industry that exhibits the forces that lead toward “natural monopolies,” or at least oligopolies. Those forces include high fixed costs — the investment needed to build out networks — and the efficiencies that come from providing services to millions of customers.

The drive to build out more sophisticated, higher-speed wireless networks will considerably increase the capital costs for network carriers. “That will almost certainly increase the natural forces of market concentration,” Mr. Noam noted.

MP: Maybe it would be best that the Department of Justice do nothing about the ATT-T-Mobile merger. As long as there is open entry to the wireless services industry, and the incumbent firms have no legal protection against current or future competition, what's the problem? The natural forces of market competition are usually the best and most effective forms of regulation.

Update: Don Boudreaux argues in this video that the proposed merger between AT&T and T-Mobile would make the wireless market more competitive, benefiting consumers.