Department of Justice Creates Frankenstein Imitation of Market Competition

Cell phone - landscape

The Department of Justice’s long-awaited merger approval for T-Mobile and Sprint is good news for consumers on balance, but the conditions required for the agency’s blessing are worrisome for skeptics of large-scale government meddling.

The department’s stubborn insistence on preserving four national wireless carriers drove many of the merging companies’ divestiture requirements and may turn satellite TV provider Dish Network into a bureaucrat-created Frankenstein competitor in the wireless sector.

Dish co-founder and chairperson Charlie Ergen says that when the proposed merger of the number three and four largest wireless carriers was in danger of not getting the government’s blessing in late May, he received a call from T-Mobile’s CEO, John Legere, saying, “Justice has said we need a fourth carrier. We should talk if you are interested.” Dish Network had amassed billions of dollars worth of wireless licenses it wasn’t putting to any purpose and was, therefore, in a unique position to move into offering national wireless service.

The deal reached with the Department of Justice still has to be approved by a U.S. District Court judge in Washington, D.C., and there’s also an unprecedented lawsuit by attorneys general from 13 states and the District of Columbia seeking to block the merger. But as the agreement stands, the new company will sell 9 millions of Sprint’s prepaid customers to Dish and give it use of T-Mobile’s network for seven years while Dish builds out its own infrastructure. In return, Dish agrees to pay the government up to $2.2 billion in fines if the new carrier fails to meet its network expansion requirements. Poof: a fourth competitor in the marketplace is born.

But no person can say with certainty what the optimal number of competitors in any given market is. Just because the marketplace has produced four national carriers lately, that doesn’t mean that four is the correct number of firms in this sector in perpetuity. To suggest otherwise is to fundamentally misunderstand the dynamic nature of markets and their ever-changing circumstances. 

But it’s precisely that hubris that the Department of Justice displayed in its vetting of the merger between T-Mobile and Sprint. In a well-intentioned effort to preserve competition, regulators have instead distorted the market by locking in an arbitrary number of players. We’ll never know what superior market response that might have occurred without government bullying a fourth player into existence.

In short, if this deal makes so much business sense, why did it require a regulator’s gun pointed at the heads of T-Mobile and Sprint executives to get it? With the looming threat of government prohibiting the merger from happening, the agreement looks a lot more like top-down planning by government lawyers than Adam Smith’s invisible hand.

Dispersed knowledge is the genius of capitalism. Private entities, acting voluntarily through commerce, coordinate the interests of consumers, businesses, investors, and others with skin in the game, to produce an informed answer to the market’s questions. This process is very nearly the opposite of trusting that so-called experts (bureaucrats, academics, or politicians) possess sufficient knowledge and sufficiently chaste motives to justify overriding what would otherwise happen. 

The government’s meddling in the merger of T-Mobile and Sprint is a good reminder that even tinkering done with the best of intentions is inferior to the intelligence of the marketplace and the wisdom of restraint.