One of the arguments made in the proposed Comcast-Time Warner merger is that these two, very large cable companies do not actually compete. They are in different markets. This is something Tyler Cowen, for example, has pushed as a reason the merger should go ahead. Now this might be a good argument as to why, straight out horizontal stories won’t cut it to prevent this merger and we would have to look elsewhere. But what should cause us to have pause was an issue raised in this excellent commentary on the state of the industry by John Oliver. Now it is 13 minutes long and the part I want to address is buried within but it is so good that anyone who reads this blog would surely prefer to devote 13 minutes of their scarce attention to it first. Go ahead, I’ll wait.
The part I want to address is where John Oliver asks: how is it that cable companies are not competing? After all, we can drum up a story of last mile bottlenecks and sunk investment and non-contestable markets. But the truth remains that somehow these two giants have managed to avoid competition in “the way a drug cartel divides up territories” (to quote Oliver).
I don’t have a definitive answer to this but we are all fans of situations where economic theory provides stories that are hard to plausibly deny. And just last week I released an NBER Working Paper co-authored with Martin Byford, that provides a theory as to why cable companies in the US don’t compete. Here is the abstract to “Collusion at the Extensive Margin.”
We augment the multi-market collusion model of Bernheim and Whinston (1990) by allowing for firm entry into, and exit from, individual markets. We show that this gives rise to a new mechanism by which a cartel can sustain a collusive agreement: Collusion at the extensive margin whereby firms collude by avoiding entry into each other’s markets or territories. We characterise parameter values that sustain this type of collusion and identify the assumptions where this collusion is more likely to hold than its intensive margin counterpart. Specifically, it is demonstrated that Where duopoly competition is fierce collusion at the extensive margin is always sustainable. The model predicts new forms of market sharing such as oligopolistic competition with a collusive fringe, and predatory entry. We also provide a theoretic foundation for the use of a proportional response enforcement mechanism.
You don’t have to read the paper. You already know the argument: potential competitors stay out of each other’s turf and divide the market. The point of the paper is that this type of collusion is understudied in economics and, indeed, one of the implications is that it has consequences for mergers.
Why this is relevant is because, if this is the reason Comcast and Time Warner do not currently compete more extensively, then to allow them to merge precisely because they don’t compete seems to be rewarding and cementing that very behaviour. Thus, those who say Comcast and Time Warner should merge because they don’t compete should also explain precisely why they don’t now and ought not to compete in the future.