Privatize the Spectrum

Great post from Alex Tabarrok at Marginal Revolution. See Privatize the Spectrum.

"The proposed merger between AT&T and T-Mobile is getting a lot of attention with most of the focus being on whether consumers will pay higher prices. The answer is maybe. Prices per minute have been falling and this was true even following the two big mergers in 2004-05 (Cingular/AT&T Wireless, and Sprint/Nextel). Quality-adjusted prices, i.e. taking into account the post-merger buildout of 3G networks, have fallen even further. On the other hand, although there are competitors in many large local markets and potential competitors (the Cable companies own a chunk of spectrum not yet in use) a merger could increase market power. But even if consumer prices did rise the merger is probably still a good idea. It’s long been known that even small cost savings can outweigh losses to consumers from a price increase (Nobelist Oliver Williamson was one of the first to drive this point home.)

The big issue, however, is not the merger. The big issue is reallocating spectrum from low to high value uses. My colleague Thomas Hazlett argues that spectrum currently being used for low-value over-the-air broadcast of television could, if it were reallocated to high-value uses like wireless, increase consumer welfare by over a trillion dollars. Moreover, for a price of about 3 billion we could switch almost all of the tv-viewers to cable or satellite. President Obama has pledged to move a big chunk of spectrum, about 500 mhz, to wireless but the process is slow and highly politicized. What really needs to be done is to auction off as much spectrum as possible with as few restrictions on it use as possible. Let the market allocate spectrum across all uses, allowing value maximizing trades. More spectrum would not only be good in itself it would alleviate any concerns about the merger."

Here is the link about Williamson: Williamson trade-off model. The idea is that when two firms meger, if they get more efficient and lower cost, the fall in consumer surplus due to a higher price (the market becomes less competitive) is more than offset by the gain in producer surplus. So overall, society benefits. Here is the graph: