DOJ Probes Telecom Giants

     July 6—The Antitrust division of the US Justice Department has
started an informal probe of large US telecommunications
companies such as AT&T Inc. and Verizon Communications to
determine whether they are abusing their market power in the
form of exclusive agreements with handset manufacturers (such
as AT&T’s contract with Apple Inc to offer the iPhone).

Lawmakers are mainly concerned with whether such
agreements are deterring competition from smaller wireless
service providers and taking advantage of consumer
preferences for popular phones. The (ongoing and unresolved)
economic debate of the ideal extent to which an oligopolistic
industry should lean towards perfect competition or monopoly
to produce efficient outcomes and promote technical progress
is at the heart of this issue, as the telecom industry is certainly
an oligopoly in which technology and product development
occur at a relatively fast pace.

On the one hand, the general gut reaction seems to be that
more competitive industries are not only more efficient, but
create greater incentives for innovation. Elementary
economic theory maintains that as a market’s structure
strays further from perfect competition, resources are
increasingly misallocated and outcomes are increasingly
inefficient. Lending further support, intuition says that the less
influence firms have over their market, the more inclined they
are to compete for market share through price, quantity, and
product differentiation channels. Thus, protecting a firm’s
monopolization over certain markets within their industry
reduces the role of exhibiting competitive behavior to their
survival.

On the other hand, however, giving companies the opportunity
for monopolizing certain product markets may in fact promote
competition, stimulate technical development, and protect and
grow smaller firms with exclusivity rights phones that prove
immensely popular. Telecom firms, in competing through their
prices for service and products and through differentiation of their
service and products, have multiple channels through which they
might extract market power. One firm’s monopolization over a
popular product may, by capitalizing a larger share of the overall
market, incentivize other firms to cut prices or to invest in
developing and improving their own services and market offerings
in attempt to augment their own respective market shares.
Further, the opportunity for product monopolization that
exclusivity agreements provide for, creates a barrier to market
entry to outside firms that may induce prospective firms to offer
a product that might not have otherwise by protecting them from
the information and technological cannibalization effects that
emerge in markets without such exclusivity mechanisms.

Authors: Brian McGuckin, Ka-Wa Chan

Article:
http://www.reuters.com/article/newsOne/idUSTRE5654LK20090706?pageNumber
=1&virtualBrandChannel=0