Abstract
This article has examined the relationship between mergers and their impact on average per-person wages for incumbents, over long periods of institutional changes within the United States telecommunications industry, from a public interest perspective. We evaluate the relationship of mergers and wages across two differing periods; one, when the sector was completely regulated, and, the other, when competition was introduced after the Telecommunications Act of 1996. We treat mergers as endogenous and use treatment effects analysis to examine the relationship of mergers and wages. Having split the data set into data for regulated and deregulated periods, we find no impact of mergers on wages in the regulated period. In the deregulated period, however, between 1996 and 2001, we find a significant negative impact on mergers and wages. For firms experiencing mergers, real average wages per employee are a third lower than in non-merging firms. This suggests a post-merger cost-cutting approach by firms. Our before-and-after findings of wages declining after mergers, in the 1996 to 2001 period, lead us to conclude that the merger approvals given after the passage of TA 1996 will not have met public interest guidelines as per which merger outcomes ought to be fair to affected firms’ employees and stakeholders. Additionally, we suggest a resolution to the empirical puzzle, of half-negative and half-positive merger and wage outcome findings existing in the literature, by incorporating institutional context into our analysis to explain why during some periods of time the relationship of merger and wage outcomes may be positive and at other times may be negative.
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Notes
Merger transactions account for a large proportion of the gross domestic product. In the United States, over 15,000 mergers occurred in the 2000s, and the demand for evidence on merger outcomes is large (Kwoka 2013). Mergers have wide-ranging impact, and assessment of their impacts is vital (Carlton 2009).
There is shortfall of evidence as to how institutional changes affect the behavior of firms (Short and Toffel 2010), and the literature has not engaged in comparative analysis to assess the impact of institutional features in determining outcomes of institutional regimes (Sokol 2010). Behavior outcomes are influenced by incentives, and these vary according to institutional contexts (Aoki 1996; North 1990). Institutions comprise of the cognitive, normative, and regulative elements that provide social and economic meaning (Scott 2001).
Institutional decisions exacerbate competition, with considerable wage impacts (Dube and Kaplan 2010; Feenstra and Hanson 1996; Neumark et al. 2008). Impacts of enhanced competition due to institutional decisions are lost jobs and lowered wages in incumbent firms. For the incumbent firms, margin reductions lead to cost-cutting, job losses, and real wage drops (Abraham et al. 2007; Katics and Petersen 1994; Revenga 1992). Pressures for lowered prices and reduced margins lead to demand increases, attracting new firm entry and jobs. Increased competition reduces job security and wages (Amable and Gatti 2004; Blanchard and Giavazzi 2003; Gersbach 2000).
Institutional logics shape behavior via their effects on individuals’ perceptions (Friedland and Alford 1991). The institutional logics approach incorporates a framework of how institutions, and their underlying logics, shape action (North 2005). Firm behavior evolves along different time paths due to institutional variations (North 1994). Historical contingencies generate contextual variations, influencing normative reactions. Each firm’s social and political context is unique (Dosi and Marengo 2007), and the behavioral implications of changing institutional regimes are different (Fukuyama 2011). As institutional contexts change, the logic of rules and regulations that make up institutions will have been affected by forces exogenous contingencies might engender, so that incentives and behavior alter. Hence, differing outcomes will be observed in differing institutional contexts. Institutions are also generative forces defining the context based on political factors (de Figueiredo 2002) and are political but non-technologically determined constraints influencing social interactions by providing incentives for behavior regularity (Greif 1998).
Firms scan the environment (Nelson and Winter 1982) and reconfigure capabilities to meet performance goals (March 1991). As altered logics lead to changes in interpretations of contingencies, firms relate asset reconfigurations to context changes, (Nelson 2007) and resource reconfigurations occur (Teece 2007).
A view suggests that policies to engender the competitive process and associated performance outcomes have been ineffective (Crandall and Winston 2003). However, another view postulates that policy has been effective (Baker 2003; Werden 2003), and the issue remains unsettled (Buccirossi et al. 2013). Hence, additional historically contingent analyses are apposite.
The intent of TA 1996 was to promote competition. The pre-TA 1996 and the post-TA 1996 environments were different. A major impact of the TA 1996 and its implementation by the FCC and state commissions was to eliminate the MFJ’s line-of-business restrictions keeping Regional Holding Companies (RHCs) from entering in-region inter-LATA markets. Restrictions keeping other types of carriers from entering local exchange markets were eliminated. Restrictions preventing the RHCs and other ILECs from providing local telephone service outside their franchised territories were eliminated. Long-distance interexchange carriers (IXCs), competitive access providers (CAPs), such as new competitive local exchange carriers (CLECs), and cable system operators (CSOs) were allowed to offer local, intra-LATA, and inter-LATA telephone service. A firm obtaining certification from a state commission could offer local services using its own facilities and unbundled network elements obtained from ILECs or resell ILEC’s local services purchased from the ILECs at wholesale prices.
The ability to dominate related markets would not motivate local exchange companies to merge, since each carrier’s price and service quality would be regulated by different state regulatory commissions. At best, a merger, say, between Southwestern Bell Corporation (SBC) and Pacific Telesis, would make the combined RHC a strong entrant in territories not adjacent to the territories of the ILECs coming under a combined SBC-Pacific Telesis umbrella.
A vertical merger would be between a RHC, like SBC, and an IXC, say like AT&T.
In the local exchange sector, the 50 largest companies accounted for 99% of the lines; of these, 40 companies accounted for 95% of the lines.
In 1991, the operations of Mountain States Telephone and Telegraph Company, Northwestern Bell Telephone Company, and Pacific Northwest Bell Telephone Company were combined to form US West Communications. In 1992, the amalgamation of South Central Bell Telephone Company and Southern Bell Telephone and Telegraph Company operations, as Bell South, took place. Simultaneously, several non-RHC groupings were acquired by other groupings. Thus, Continental merged its companies, such as Contel of California, Contel of New York, Contel of Virginia, and Contel of Texas with GTE. These events occurred in 1990. The operating companies of United were acquired by Sprint in 1991, and the operating companies of Central Telephone Company were acquired by Sprint in 1992.
The transition from one mindset to another could be contrapuntal (Said 1979) in that the counter-voice proposing change within an existing discourse of institutional rules could be situated within the main discourse as a contained interrogation, rather than as a dismantling force (Rajan 1999), thus unlikely to be leading to radical changes in firm behavior. Alternatively, the transition in institutional logics could be an interruptive force (Spivak 1988), evolving as a contested interrogation of the received discourse of institutional rules, leading to a confrontation of existing assumptions governing firm behavior such that firm behavior would radically alter.
Research has upheld the market power argument. The acquisition of power is a popular theme and has influenced the passage of the Merger Guidelines by the United States Government (Baker 1997).
The objectives of TA 1996 were as follows: “To promote competition and reduce regulation in order to secure lower prices and higher quality services for American telecommunications consumers and encourage the rapid deployment of new telecommunications technologies.”
The legislation recognized the telecommunications network as a network of interconnected networks. Existing ILECs were required to interconnect with new entrants at any point the entrant wished. Also, the legislation required ILECs to lease parts of their network as unbundled network elements to competitors at cost, to provide at wholesale prices any services the firms provided to competitors, and to charge reciprocal rates in termination of calls to their network and to networks of local competitors. The impact would alter a regulated public utility mindset to a competitive technology entity mindset. This would imply that firms’ critical practices would be to engage in strategic actions to face competitors. If a regulated utility mindset transitioned to a competitive entity mindset, perceptions about actions in a new era could alter. Contestability-enhancing competition would make performance bench-marking easier, reducing information asymmetries and intra-firm agency problems (Hart 1983; Leibenstein 1976), and permitting managers to display better outcomes, providing incentives to invest in effort (Nalebuff and Stiglitz 1983; Vickers 1995).
The local exchange company mergers have not been traditional horizontal mergers with two competitors merging to enhance market power and raise prices. In addition, the emergence of inter-modal competition has been substantial (Loomis and Swann 2005). This contingency would create a check on the motivation for local exchange mergers to raise prices. These mergers have been congeneric in nature, to acquire capabilities rather than market share (Rosenberg 1997), and the merger events correlate with a merger list maintained at www.cybertelecom.org. The way the firms keep records, based on regulatory requirements, each firm retains its accounting identity. Data for merger firms are reported separately. Hence, for every firm after merger, its performance relative to itself in the past, when it was not taken over, or relative to either other independent or merged firms in the same period, can be evaluated given the panel data.
The design of dummy variables to control for merger impact is based on existing research (Brown and Medoff 1988; Gugler and Yurtoglu 2004; Majumdar et al. 2010). Dummy variables’ use is consistent with prior competition policy literature (Fisher 1980; Rubinfeld 1985), and dummy variables have been used in evaluating the estimated price impact of cartels or mergers (White 2011).
See Andrade et al. (2001), Berkovitch and Narayanan (1993), Bhagat et al. (1990), Gaughan (1996), Goold and Luchs (1993), Jensen (1988), Lambrecht (2004), Matsusaka (1993), Mitchell and Mulherin (1996), Ravenscraft and Scherer (1987), Shleifer and Vishny (1991), Stallworthy and Kharbanda (1985), and Walter and Barney (1990), for reasons as to why firms merge.
The use of treatment effects models (Rubin 1974), with endogenous mergers as treatments firms undergo, is recent in merger analysis; two uses for European data (Egger and Hahn 2010; Gugler and Siebert 2007) exist. Treatment effects are useful in evaluating natural experiment outcomes, where some firms adopt a particular strategy, such as a merger, or experience a particular policy, while others do not. Natural experiments are identifiable and non-recurring actions occurring over a relatively clearly defined and sustained period of time, but which then end (White 2011). Treatment contingencies provide the natural experiment functionalities. For those facing the experience, the contingency is a treatment. Full details of the treatment effect modeling approach are contained in Guo and Fraser (2010), elsewhere, and in our other papers.
A treatment effect is the average causal effect of a variable on a variable of interest, such as a merger. A transition from a non-merged state to a different merged state is a treatment firms receive. A treatment effect model considers the merger variable as a covariate influencing wage outcomes, after it has been modeled as a dummy endogenous variable influenced by covariates. Treatment effect modeling permits pre- and post-event evaluations. The likelihood of firms engaging in mergers will have been conditioned by several intrinsic factors, because of self-selection into treatment (Heckman 2001; Heckman et al. 1997). In respect of instrument choice for the endogenous parameter being identified by the instrument (Heckman and Vytlacil, 2005), the instruments may or may not be a subset of the primary explanatory variables used for explanation (White 2011). The exclusion criterion, normally applied in instrumental variable analysis, is relaxed in this method (Amemiya 1985; Maddala 1983), as many firm-level factors influencing mergers will also influence wages.
Hence, our data have been split into the following two portions: one portion for the pre-1996 period and one portion for the post-1996 period.
Lagged wages would be extremely important variables in explaining current wages.
Card (1997) had shown a 10% decline in the earnings of airline workers after deregulation, with similar declines for pilots, flight attendants, managers, and secretaries. Hirsch and Macpherson (1997) found that trucking deregulation from the 1970s to the 1990s had led to relative wages of drivers falling by 15% for unionized drivers, while non-unionized drivers’ wages had fallen by a smaller percentage. Hirsch and Macpherson (2000) and Peoples (1998) analyzed airline wages after deregulation, finding wage stagnation after deregulation and the introduction of competition in the United States.
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Majumdar, S.K., Moussawi, R. & Yaylacicegi, U. Mergers and Wages in Digital Networks: a Public Interest Perspective. J Ind Compet Trade 19, 583–615 (2019). https://doi.org/10.1007/s10842-019-00297-1
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DOI: https://doi.org/10.1007/s10842-019-00297-1
Keywords
- Congeneric mergers
- Human capital
- Institutional regimes
- Public interest
- Retrospective policy assessments
- Telecommunications industry
- Wages