Economic Model for Monopoly Analysis Term Paper

  • Length: 30 pages
  • Subject: Business
  • Type: Term Paper
  • Paper: #47374384

Excerpt from Term Paper :

The deal was immediately criticized as anti-competitive by William Kennard, the chairman of the Federal Communications Commission, and by the Communications Workers of America, which represents some workers at both of the merged companies. But neither government regulators nor union bureaucrats will have the slightest impact on the latest merger. They have neither the power nor the desire to oppose the plans of the giant telecommunications monopolies. More substantial opposition to the merger exists among the overseas rivals of the huge American firms. Deutsche Telekom and France Telecom, the semi-privatized telecommunications companies of Germany and France, each owned 10% shares of Sprint, and Deutsche Telekom at one point sought to enter the bidding to acquire the entire company. Now both European firms will sell their holdings because MCI WorldCom is in competition with them in the European market. It is the second time that WorldCom chief Ebbers has spiked an attempt by European telecommunications companies to break into the U.S. market, following last year's contest between WorldCom and British Telecom to take over MCI. British Telecom has since formed an alliance with AT&T (McGaughlin, 1999).

It was also the second defeat for Deutsche Telekom in two months, after its failed effort to merge with Telecom Italia, whose board of directors accepted a rival bid from the much smaller Italian firm Olivetti, preventing the formation of a German-Italian telecommunications giant with a dominant position on the continent. Ebbers was able to use the then vastly inflated value of American stocks as a weapon in this competitive struggle against foreign rivals. A former basketball coach and motel operator, Ebbers took over LDDS, a small long distance provider based in Jackson, Mississippi, over a dozen years ago, and used it as the basis for more than 60 takeover bids, all of them utilizing complex stock swaps made possible by the booming U.S. stock market (McGaughlin, 1999).

The increasing scale of mergers and takeovers is a characteristic not only of the telecommunications industry but of world capitalism as a whole. Of the 10 largest mergers in U.S. corporate history, all 10 have taken place within the last ten years. But even this record pace has been dwarfed by the merger and acquisition activity in Europe. In the first nine months of 1999, total worldwide mergers and acquisitions hit a record $2.2 trillion, 16% above the figure for the year-earlier period. Mergers and acquisitions in the third quarter alone were $780.9 billion, up 45.8% from the year before. European merger activity in the third quarter accounted for nearly half, $374.6 billion, triple the figure of a year earlier and exceeding the $322 billion in mergers among U.S.-based companies (McGaughlin, 1999).

Since the enactment of the Telecommunications Deregulation Act in 1996, the players in the telecommunications industry have continued to form alliances akin to monopolies, thereby hampering the efforts to deregulate and encourage additional competition in the telecommunications industry. Keeping the fact in mind that in 1996 there were eight major U.S. companies providing local telephone service, and five significant long-distance companies, in only three years these thirteen companies merged into five telecommunications giants and this trend continues to this day. The concern over monopolies grows ever more intense. Overseas telecommunications firms are especially anxious to improve the level of competition and the access that they have to other segments of the consumer population. Additionally, current customers of the larger firms would like to see the savings that competition would ultimately bring.

One of the contributing factors to the flavor of this industry is that market entry as a primary competitor is expensive and difficult, with regulatory hurdles and heavy startup costs paving the way. This strengthens the position of the current stakeholders and provides an environment in which the bells can retain and maximize the lion's share of the market. More recently, the Consumers Union and the Consumer Federation of America attempted to block the 2004 AT&T Wireless/Cingular merger, which represented the combination of the country's second and third biggest cell phone firms. (Note: Cingular is owned by two of the largest bells: SBC and BellSouth.) The petition filed with the FCC claimed: "This merger proposes an unacceptable level of concentration at the nation level, clearly in violation of the merger guidelines, but the anti-competitive effects this merger will have on local markets is of even greater concern." (Murray, 2004)

Prior to 1996, as others began to wish to enter the marketplace, they found it difficult or nearly impossible to compete with the giants. This scenario was not conducive to the ideals of free enterprise and true capitalism, so the government decided to act. They passed the Telecommunications Act of 1996, which de-regulated the industry and paved the way for open competition. The act included provisions for helping new companies enter the marketplace including providing extra licenses in many areas and funding sources for new business startups. This created a wealth of opportunity for new businesses. In an attempt to out-compete their competition, companies experimented with new services, pricing schemes and eventually, new technology. This created a boom in new technology and led to the invention of cell phones, pagers, and other wireless products. Two things were happening consecutively: the major industry competitors were increasing market share and decreasing the number of overall larger competitors using mergers and acquisitions as a vehicle. Secondly, innovation and technology allowed for a new set of entrants to the market; smaller companies that provided goods and services which would bolster and broaden the telecommunications industry as a whole as well as its fundamental composition.

As in other sectors, the privatization of the telecommunications industry has led to a plethora of business startups. Some of them became shining stars and rose to the top quickly, while others crashed and burned. As in any other industry that experiences this type of boom, there were many allegations of mergers and shining stars becoming monopolistic in nature. This led to a backlog of court cases that is likely to be there for some time in the future.

The Telecommunications Act of 1996 sought to end the monopolies that existed in the telecommunications industry. Since the passing of that act, the telecommunications industry has seen a great deal of change and development, including entry of new companies into the market. The changes in the industry have opened the floodgates to new technology and services.

As previously stated, what constitutes a monopoly in one geographic and/or socioeconomic area, may not hold true for another area. Therefore it is imperative to evaluate and identify useful economic models to test for the existence of a monopoly, given the inputs and variables generic to the industry. What defines a monopoly is not an exact science, and is not clear in every circumstance. There are numerous pending lawsuits for violations of Anti-trust laws in the courts today. Economic models are useful in resolving issues of whether or not a monopoly in fact exists. Each model is applicable only given a certain scenario. A model is unreliable in screening for a monopoly if applied to a set of facts outside the parameters for which it was designed.

An economic model is really a set of decision-making devices, organizational arrangements, and rules for allocating society's scarce resources. Some economic models are very simplistic. For example, a Robinson Crusoe economy is a simplistic economic model. The models can also be quite complex -- as the everyday decisions of the 5 billion people in the world, the interactions between all firms in all countries, and the actions of all governments. The traditional approach to economic modeling is geared towards obtaining an equilibrium solution. This involves solving the maximization problems of all agents to yield market-clearing prices. Markets clear when demand is equal to supply for all goods, and also the quantities that are exchanged at these particular prices. One assumption imposed for analytic tractability that rarely captures the economic phenomenon we observe is homogeneity of agents (Yuret, 1998). Relaxing this assumption is not possible in a lot of economic models and, if it can be relaxed, the level of heterogeneity that can be modeled is still very restricted. Moreover, equilibrium solutions are not always very informative for policy purposes. For policy makers, the path to equilibrium is just as important as the equilibrium itself.

An economic model that tests for the existence of a monopoly in the telecommunications industry would be of great use in determining if a monopoly truly exists, or of the claims are unsubstantiated. This research will examine several existing models for the existence of monopolies. There are many instances in which these existing models reliably predict the existence or nonexistence of a monopoly. However, they were developed for prediction under certain types of markets and market conditions. As a result they are reliable in predicting monopolies in certain sectors of the market, however, prove themselves to be inadequate in predicting monopolies in other sectors.

The existing…

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