An Economic Analysis of the Proposed Comcast/Time Warner Cable Merger

[Commentary] Despite the controversy surrounding the proposed merger of Comcast and Time Warner Cable, "the question regulators and antitrust authorities must answer is the same as it is for any merger."

Regulators must determine if "expected benefits that flow from increased efficiencies outweigh the chances that the merger could increase the incentive and ability of the combined firm to behave in anticompetitive behavior and the magnitude of those effects."

A merger would potentially yield benefits to business customers because the increased area the merged companies would cover would make it less costly to connect customers with multiple office locations. The benefits for residential customers would be dependent on such factors as the schedule for infrastructure upgrades and how much current TWC consumers value the expanded video-on-demand library and faster broadband connection speeds.

It is difficult to predict the effect on innovation, because although fewer firms in an industry "may reduce the number of innovative paths explored," larger firms could have stronger incentives to innovate if scale allows higher returns to investment. In addition, it is not clear how much increased revenues expected from cost efficiency will affect prices for the consumer.

I find no realistic theory why larger distributors would receive better carriage deals for content than smaller distributors. The primary reason for the theoretical ambiguity is that while the content provider needs access to subscriber, the distributor needs content to distribute. Regardless, a better negotiating position does not necessarily mean harm for consumers.

Given rapidly increasing programming costs, a reduction in the rate of increase due to an improved negotiating position may benefit, rather than harm, consumers if it has any effect at all. Concerning broadband, I warn regulators and antitrust authorities against simply determining if the merged company has the incentive to bock or degrade online content.

The question is whether the merger increases the incentive and ability to do so and, if so, does the increase pose an anticompetitive threat. I also warn against considering such issues as customer satisfaction when considering the effects of the merger. Comcast and Time Warner Cable rate similarly in customer surveys, and no evidence suggests that the merger would make it worse.