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Proposed Merger Between EchoStar and Direct TV

Essay Instructions:

Please read the questions carefully, thank you.

Question Cluster for Chapter 4:  Skywars

A .   What was the historical background that led to the Echostar-DirecTV merger?

  1.  What industry are Echostar and Hughes Electronic Corporation in?    How (at that time) did this industry use the broadcast spectrum?      How does this industry relate to cable TV and to broadcast TV?  How does this industry relate to C-band systems?

  2. What is the history of DirecTV?  How did the Dish Network compete with them?  How many channels did they have access to?  Where does this number come from?

B.  How was there product market defined?  What definitions were rejected and why?

  1.  What is a multichannel video programming distributer?  What subcategories are included in this?    How does the decision of businesses to offer digital technology affect these companies businesses?

  2. What did the merging parties believe to be the relevant market?  What did the DOJ consider the relevant market?   How did those definitions differ?   What arguments did both sides make to support their definitions?

  3. How was the market definition decided for the purpose of this case?  How would you defend/criticize this decision?

C.  How was the geographic market defined?

  1.   What were the different implications of a local/national definition?

  2.   What was the case for a local definition?   What was the case for a national definition?

D.  Why did the DOJ believe that the merger would lead to non-competitive effects?

  1.   How had the two firms historically priced?   Was there evidence of competition between the two in their historic pricing behavior?

  2.   What is a coordinated price effect?   What was the mechanism for price coordination that the DOJ worried about? 

  3.    How did the DOJ compute the unilateral price effects from the merger?   How does equation (1) help with this?

  4. What was the importance of the industry wide elasticity?  Why was this difficult to estimate?  How did Goolsbee and Petrin finally estimate this?  (You may bring outside sources into this if the description in the text is insufficient.)

  5. What is the importance of estimating marginal cost?  Why was this difficult?  How did (McAvoy 2002) do this?

  6. How does the Cournot-Nash  framework help us steady the effects of monopolization?

    1.    How does it work?

    2.    How does it fit into the general analysis?
  1.   What price lessons were learned from the history of the industry?

  2. What estimate of price changes came from all of the above conclusions?

E.     What efficiency gains did the candidate companies believe would result from merger?

  1.   What were the technological constraints these companies wanted to avoid through merger?

  2. What type of improved product did they expect to result from merger?

  3.   How does the post merger (or post-failed merger) experience affect these claims?

F.   What decision was finally reached?    How has history judged that decision?

Essay Sample Content Preview:
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Proposed Merger between EchoStar and Direct TV
Historical Background
EchoStar and Hughes Electronics Corporation are both in the multi-channel video programming distribution (MVPD) which consists of television and radio stations and networks that create content or acquire the right to broadcast prerecorded radio and television programs (Gilbert and James 1). Through the satellite signals, networks transmit their signals from studios to local stations and cable distributors. When these two companies were established most satellite TV services operated at a fairly low electromagnetic frequency called C-band that is approximately 4GHz. For EchoStar and Hughes, they used direct broadcast satellite (DBS) that operates at a higher frequency of 12.2 to 12.7 GHz (Gilbert and James 1). They used electromagnetic spectrum known as Ku-band instead of C-band. Direct TV was established in 1994 and merged with Primestar in 1999. They were considered the main competitor of EchoStar that was established two years later. They both had similar receiving dish formats and had over two million subscribers. At the time of merger, Direct TV could access about 460 channels which is less than that of EchoStar which is 500 channels. These channels came from 96 CONUS frequencies (Gilbert and James 2).
Product market
Both the EchoStar and Direct TV were in a business sector referred to as multichannel video programming distribution (MVPD) which offers products such as direct broadcast, DBS, cable, C-band, and SMATV to the subscribers (Gilbert and James 4). The subscribers in this sector represented the largest portion of television households at 86.4% by 2001. The merging companies believed that any service that fell under MVPD category qualified to be the relevant product market. While DOJ agreed that most of the MVPD services were relevant product market they, argued that C-band did not qualify to be in this category as a result of its high cost (Gilbert and James 5).
Geographic Market
The merging companies believed that they had a relevant geographic market, which they indicated that it was national due to the fact that they both had national pricing plans (Gilbert and James 7). Nevertheless, the competitive analysis revealed that these companies competed at both national and local levels due to the products they offered. For instance, DBS firms offer national services, whereas cable ones offer local services. Thus, although both companies offered their services at uniform prices across the United States, the impact of acquisition would be influence...
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