Why The Wireless Market Can’t Support More Carriers

In this era of spectrum shortages, do consumers really benefit from increased competition in the mobile communications market? No, says the Phoenix Center for Advanced Legal & Economic Public Policy Studies in Washington, D.C.

Popular thinking in the wireless industry holds that more competition automatically translates into lower prices for consumers. If spectrum is readily available and as new companies enter the market, prices do fall. However, the Phoenix Center’s new economic study, Wireless Competition Under Spectrum Exhaust, finds that if spectrum is scarce, the opposite is true.

More Firms, Higher Prices

According to the report, “Our analysis finds that under a binding spectrum constraint, competition among few firms will produce lower prices and possibly increase sector investment and employment than competition among many firms.”

“Once there is spectrum exhaust, an increase in the number of firms will actually lead to higher market prices,” noted Dr. George Ford, chief economist of the Phoenix Center, in a briefing last week.

The belief that increased competition always leads to falling prices is “precisely wrong,” Ford adds. “If the FCC is going to argue that there is spectrum exhaust, it cannot simultaneously argue that an increase in competition will lead to lower prices.”

The report continues, “In the case of spectrum exhaust, too many sellers will reduce consumer welfare: prices are higher and quantities are lower than those arising from a more concentrated structure. As a result, policies that impede incumbent carriers from acquiring more spectrum — via either auction or acquisition — may do harm rather than good.”

Accept The Reality

The Phoenix Center believes policy makers need to factor spectrum constraints into their thinking when setting wireless policy. “The FCC has announced very clearly that it is concerned with industry concentration,” says Lawrence Spiwak, president at the Phoenix Center. “It still thinks we need one more firm or more than one firm. I don’t think it has done any analysis on the industry structure, given a binding spectrum constraint.”

Spiwak adds that the industry needs to accept that there will only be a few players in the wireless market: “It’s a hard and expensive business to be in, but the FCC keeps thinking that if we just gerrymander it, we’ll get one more [entrant]. I’m not sure that one more is optimal,” pointing out there’s simply not enough profit margin remaining for a new entrant to build and maintain a nationwide wireless network.

Ford urges the FCC and the U.S. Department of Justice to “become experts in concentration, not competition.”

 “The commission is learning that its hopes for 10 competitors in the wireless business is ridiculous,” he concludes. “This industry is going to continue to consolidate. It’s going to remain at a high level of concentration for a good while.”

— Jennifer Whalen