Innovation, Resource Constraints, and Mergers in Network Industries

We analyze how resource constraints and market structure interact in network industries to impact innovation. This issue has arisen recently in the United States where AT&T proposed to acquire T-Mobile's U.S. assets at least in part to obtain T-Mobile's radio spectrum, which AT&T says it needs to effectively deploy fourth generation (4G) wireless communications services in the country. However, our analysis has implications for other potential mergers and competition issues in network industries. For example, there is growing concern in the United States and Europe about Google's growing market share in many Internet markets. We find that innovation is more likely with larger firms in part because of their scale economies and also because of their incentives to respond to network effects. We also find that while smaller firms may feel discriminated against in terms of the quality of connectivity, they are actually better off with the larger firms in their markets