Streetwise Professor

This article by George Priest about the incoherence of the USDOJ Antitrust Division’s attack on the ATT-TMobile merger is worth a read.

The key fact that Priest focuses on is the response of Sprint’s stock price to the announcement of the Division’s attempt to block the merger.  If the merger really would reduce competition, Sprint’s stock price should have fallen.  The fact that Sprint’s price in fact rose is strong evidence that the merger would have increased competition in the wireless market.

The key analytical point in the article is this:

Much of the Justice Department’s failing on this issue derives from its failure to understand that network industries must be evaluated differently from more traditional, manufacturing industries. The market share guidelines upon which the Justice Department relies to oppose this acquisition may make sense in the context of manufacturing industries. But they make no sense in the context of networks in which there are great benefits from large networks with large market shares.

This was the mistake the Justice Department made in the Microsoft case almost a decade ago. It wanted to break up Microsoft, supposedly to create greater competition among Web browsers. The courts prevented the effort, and to good effect.

The rise of Google, Facebook and the competition from smartphones that resemble computers have shown that the focus then on browser competition misunderstood the rapidly changing nature of network competition. The Obama administration is making the same mistake with its opposition to AT&T’s acquisition of T-Mobile.

This is exactly right.  And it helps explain the intellectual confusion at DOJ and in the European Commission on all matters relating to financial exchanges and financial markets.  Financial trading is a network industry, and the same failure to understand the implications of network economics for market structure that has muddled antitrust enforcement in telecomms and software is leading to a similar muddle in antitrust analysis of financial markets.