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April 26, 2013

Will Spectrum Set-Asides Really Work?

It’s a bit early to tell what ultimately will result from the furious merger activity in the U.S. mobile service provider market at the moment. Nor is it possible to predict whether national market structure will change as a result of all the activity, or whether regulators will allow more consolidation among the largest four national providers.

The U.S. Department of Justice (DoJ), for example, has signaled its belief that upcoming spectrum auctions should favor Sprint and T-Mobile USA, as a way of protecting market competitiveness. Also, regulators in other markets have said a minimum of four national mobile operators are essential for competition. The same concerns exist regarding U.S. market structure.

At the heart of all such debates are theories of how to provide maximum consumer benefit. Where the DoJ argues that favoritism has to be shown to the weaker and smaller carriers, others, including AT&T, would argue that all such favoritism is unfair.

Some also would argue that policies steering resources to weaker players ultimately fail to provide as much benefit as allowing a few bigger players to amalgamate bigger chunks of spectrum, for example.

Ironically, spectrum set-asides reserving spectrum for smaller competitors actually leads to worse outcomes, economists at the Phoenix Center for Advanced Legal and Economic Policy Studies argue.

The issue is how to structure policy in ways that maximize end user benefit under conditions where spectrum remains scarce. “Our analysis finds that under a binding spectrum constraint, competition among few firms will produce lower prices than competition among many firms, and will possibly increase sector investment and employment,” the Phoenix Center said.

“Efforts to impede incumbent carriers from acquiring more spectrum via either auction or acquisition may do harm rather than good,” Phoenix Center added. That might be counter intuitive, but the point is to “do good, not feel good,” one might say.

One might argue, based on actual results in every country, that the mobile market, no matter what we might think should be the case, eventually consolidates into a handful of suppliers, typically ranging from three to four, at the moment.

The most common market structure is three leading contestants.

Regulators might reasonably be expected to do what they can to maximize the number of market contestants. Whether that ever provides the expected benefits, or even works, is the bigger issue.




Edited by Alisen Downey


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