The Antitrust Implications of Capacity Reallocation by a Dominant Firm

When a firm acquires rival firms in one market, and moves their capacity to another market, should antitrust authorities be concerned? We address this question by studying a multi‐stage game. A dominant firm has the opportunity to acquire fringe firms that operate in the same market. Then, the dominant firm has the opportunity to move capacity from that market to a second market. The model is motivated by a series of acquisitions in the Specialized Mobile Radio industry aimed at establishing a new cellular carrier. We derive necessary and sufficient conditions for the dominant firm to acquire too little capacity relative to the social optimum. The results shed light on the Consent Decree negotiated in US v. Motorola Inc. and Nextel Communications Inc., 1994.