Abstract
The welfare effects of mergers in the mobile industry is the topic of an ongoing debate, however, there is still a lack of empirical evidence about the effect on consumer surplus. In this paper, we provide a simple structural model that accounts for investment in order to investigate the effect of mergers on consumer surplus in the mobile industry. Using a Cournot model with investment in cost-reducing technologies, and data on mobile Internet traffic from 18 European markets, we find that consumer surplus is maximized in markets with 3 symmetric operators. This finding accords well with a rising price per user and investment as a result of a merger. It suggests that, in mobile mergers, except 3-2 merger, dynamic efficiencies from investment outweigh static efficiencies from market power.
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Notes
See Bertschek et al. (2015) for a review of the literature. Roller and Waverman (2001) and Czernich et al. (2011) who find significant positive effects of telecommunications infrastructure on Gross Domestic Product, and Bertschek and Niebel (2016) who find that mobile internet usage by employees does cause higher labour productivity.
See the EU Commission decisions on these mergers: M7018, M6992 and M7612.
The Austrian regulator and the competition authority conducted an ex-post evaluation of the merger between H3G and Orange in 2013 and find an increase in price per user in the long run (RTR 2016). In a report commissioned by the European Commission, Aguzzoni et al. (2015) conduct an ex-post evaluation of the approved mergers in Austria (2006) and The Netherlands (2007) and find mixed results. The Austrian merger did not affect price, whereas the merger in The Netherlands tend to be associated to a price increase.
Gagnepain and Pereira (2007) show that consumer surplus increases with entry into the Portuguese mobile market. However, their analysis focuses on the years 1992–2003, a period when investment was focused on voice and not, as is currently the case, on mobile Internet.
This functional form can be derived from a framework where variation in the stock of knowledge is proportional to development effort (\(dA=Ad\mu\)), and that development effort is a concave function of investment (\(\mu (z)=\beta ' \ln z\)). It can be shown that the constant marginal cost writes: \(c(z)=\frac{C_0}{A(z)}=\frac{C_0}{A_0}z^{-\beta '}\). Where \(C_0\) is the initial cost of production and \(A_0\) is the initial stock of knowledge. \(\alpha ' \equiv \frac{C_0}{A_0}\).
See Dasgupta and Stiglitz (1980).
Note that Eq. (8) holds as long as the elasticity of demand is greater than 0.5, that is \(\beta \ge 0.5\). Under this condition, \(1-\frac{1}{\beta N} \ge 0\).
The tricube weighting function is defined as follows:
$$\begin{aligned} K(u)= \frac{70}{81} \left( 1- u^3\right) ^3 . \end{aligned}$$(14)For all u such that \(|u| \le 1, u=l-k\).
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Acknowledgements
A previous version of this paper was presented at the 27th European Regional Conference of the International Telecommunications Society in Cambridge (UK) in September 2016 and the International Industrial Organization Conference in Boston (US) April 2017. The authors are grateful to the participants and two anonymous referees for their comments and suggestions. The usual disclaimer applies.
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Houngbonon, G.V., Jeanjean, F. Investment and market power in mobile mergers. J. Ind. Bus. Econ. 46, 65–81 (2019). https://doi.org/10.1007/s40812-019-00110-4
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DOI: https://doi.org/10.1007/s40812-019-00110-4