Is Media Consolidation Beneficial? How Big is Too Big to Fail?
https://www.theepochtimes.com/the-curious-case-of-the-att-time-warner-merger_2580392.html
In a highly-publicized contestation in Washington D.C, a judge decreed the proposed vertical merger between corporate giants AT&T and Time Warner as not in violation of U.S antitrust law. The Department of Justice (DOJ) opposed this merger on the basis of theoretical higher prices for AT&T’s competitors post-merger. In court, the DOJ argued that these higher prices would be passed onto consumers, and that therefore the merger should not be approved. Professor Carl Shapiro aided the government’s case by using an economic model based on Nash’s bargaining model. Although this article argues that such economic models are often misused and takes a skeptical stance on the game theoretical approach to the issue, it offers an outline of the model itself which gives us insight into a practical application of network exchange theory.
Firstly, AT&T’s role as a satellite TV provider through DirecTV would give it increased leverage to increase prices of channels and networks owned by Time-Warner (for example CNN and TNT). This is partly due to the creation of preferable outside options for Time-Warner (of AT&T’s satellite provision) when it comes to selling its products: Time-Warner would prefer post-merger to simply sell (though it is not technically selling as they would be the same company) at a low cost to AT&T. This outside option is appealing because post-merger Time-Warner would also reap dividends from lower costs for AT&T (additionally because excluding other service providers increases demand for DirecTV), because, by definition of the merger, they would be the same company with the same profit-maximizing bottom-line. Before the merger, Time-Warner would lose subscribers (and therefore revenue) if it increased prices of its channels (refusing to sell to other satellite TV providers), however post-merger AT&T-Time-Warner would be able to gain from such price increases, as DirecTV would absorb new subscribers if Time-Warner didn’t sell its channels to other satellite providers (as a result of higher price demands): a significant number of subscribers would switch to a provider that has the channels they want, and if the satellite provider cannot pay AT&T-Time-Warner’s increased prices, they will switch to one that does, DirecTV (which gains Time-Warner’s channels at a low cost). Taking the more macro view, the components in this media networks have changed power relations post-merger such that the new component of AT&T-Time-Warner has greater bargaining power and leverage due to its new position in the network as a combination of two previous components that collectively benefit from each others’ power.
This model using Nash’s bargaining to explain the perceived market altering effects of the merger of two colossal corporations (though it was not able to stop the merger). In this way, basic ideas such as Nash bargaining can help predict complex underlying effects in order to inform decision-making even at the policy level.