Consumers Overcharged $60 Billion Per Year, Says Consumer Federation

The consumer group claims that the ATT/Time Warner merger will expand market power abuse

Consumers Overcharged $60 Billion Per Year, Says Consumer Federation
Image: Pixabay
December 7, 2016

The Consumer Federation of America (CFA) has issued a report showing that four communications companies—ATT, Verizon, Comcast, and Charter—dominate all the major digital communications product markets, resulting in a "tight oligopoly on steroids" abusing its market power to overcharge the typical household roughly $45 per month, or $540 per year.

The markets include wireless, broadband internet access, video, and business data services, says the non-profit consumer group. The amount by which the companies are overcharging consumers represents nearly one fourth of the amount that the typical household spends on communications products. The CFA's report shows that the total overcharges—nearly $60 billion annually—lead to a huge waste of resources that end up being spent in mergers and acquisitions accumulation of liquid assets and excessive dividends.

"Stockholders love the astronomical rate of return, but consumers hate it," said Dr. Mark Cooper, CFA's director of research and also the author of the report, "which is reflected in the very low ratings that these products get in consumer satisfaction surveys."

Cooper noted three themes from the recent election that are highlighted by the group's report: pocketbook populism, big media concerns, and the anti-merger position of both parties' leaders.

"This is a key test of whether there is a genuine commitment to address these problems," he said. "Rejecting the merger will be an important step in stopping the growth of the tight oligopoly on steroids, but there will still be a lot of work to do to control the abuse of market power by the dominant communication giants."

According to the CFA, the markets for digital communications products fit the usual definition of a tight oligopoly by both traditional economic standards and current antitrust products. All the markets are highly concentrated, and the combined market share of the top four companies is much greater than 60 percent. The report indicates that several factors magnify the market power held by this oligopoly.

From the market structure perspective:

  • All of the markets are dominated by the same four companies.
  • These four companies had been granted monopolies in core franchises service territories before the Telecommunications Act was passed in 1996, and they did not compete with each other in these territories. Cable companies never overbuilt other cable companies and the same was true of telephone companies. Cable never strayed into wireless, and telephone companies entered video only slowly.
  • There have been rapid declines in costs, resulting in further surplus that can be captured by service providers as excess profits when there is no vigorous competition.
  • The result is that these companies have a significant amount of geographic separation, technological specialization, and product segmentation, making them able to lessen head-to-head competition.

From the supply-side conduct perspective:

  • The behavior of these companies reinforces their power over the markets with significant attempts to work together in distributing services as well as in tight support of public policies preserving that power.
  • They use parallel, anti-competitive terms and conditions in contracts when selling network services within their home service territories.
  • When purchasing services outside their home territories, the companies' business practices reflect a reciprocity that does not allow competition.

Regarding demand, the possibility of market power abuse has become more likely because consumers have less ability to choose.

  • The services provided by these companies have been necessities that how low demand elasticities and moderate elasticities of income.
  • The differences in the services' technologies and functionalities make them complements rather than good substitutes.
  • High costs for switching make it both hard and expensive for consumers to change to a different supplier in the few cases where they actually have a choice.
  • The services are often bundled.

"The merger would provide a powerful tool to dampen competition in the two areas of the digital market that have shown the best hope for the growth of competition – wireless and online video. By favoring its products with bundles and discriminating against potential competitors, it would weaken competition," said Cooper.

"The ultimate harm may be to trigger a merger wave in which each of the other dominant firms would be forced to integrate vertically. If the responsible authorities don't say no to this merger, we are likely to see all the major content producers gobbled up by the dominant communications giants."