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Wednesday, October 04, 2006

The Rocket Monopoly

Creating a monopoly to protect national defense:

Rocket Monopoly Approved, by Renae Merle, Washington Post: U.S. antitrust authorities yesterday approved a plan by Lockheed Martin Corp. and Boeing Co. to merge their government rocket businesses, creating a monopoly in a multibillion-dollar market that the Federal Trade Commission acknowledged will probably lead to higher prices and lower quality. ...

"Monopolies almost always lead to higher prices, lower quality and inferior services," Michael R. Moiseyev, assistant director of the FTC's bureau of competition, said in a July letter that was made public yesterday. "Here, the competition that would be lost is significant, and the economic benefits that may materialize are unlikely to trump the transaction's harm to competition."

The Defense Department has expressed concerns that with only a few rocket launches each year, one of the two companies could have been pushed out of business. Loath to be dependent on one type of rocket, the Defense Department argued for the joint venture, to be known as the United Launch Alliance.

Under the agreement, both Boeing's Delta and Lockheed's Atlas rockets will still be produced. ... Some jobs will be eliminated. ... The companies have said they expect the joint venture to generate $1.5 billion to $2 billion in revenue per year from the government and save it $100 million to $150 million a year.

Pentagon and FTC officials said the cost savings do not offset the impact of the loss of competition. The department's "careful review of those savings leads us to conclude that the cost savings, while attractive, are not adequate to support the loss of competition," Kenneth J. Krieg, the Pentagon's acquisition chief said, in an August letter to the FTC.

Yet, in the end, Defense Department officials were more concerned that they could be left with only one company capable of launching their satellites, which have become an increasingly important part of fighting wars. ...

"DoD has concluded that ULA would improve national security and that the unique national security benefits from the joint venture would exceed any anticompetitive harm," the FTC said in a statement yesterday.

Currently, Boeing and Lockheed are the only two U.S. companies that launch the heavier satellites needed by government agencies, though other companies can launch smaller versions. ...

As for regulation of the monopoly:

Approval was contingent on an FTC consent decree ordering the companies to cooperate with potential competitors such as Northrop Grumman Corp., which makes satellites but does not launch them. Ordinarily such an agreement would not be considered an effective remedy to anticompetitive concerns, FTC Commissioner Pamela Jones Harbour said... But, she added, "I lack the technical expertise to second-guess DoD's conclusion that allowing the formation of ULA is the best way to preserve national security and protect the public interest."

Some industries need to be protected for national defense. However, it should be possible to create a more competitive market structure while still supporting the industry. But if a monopoly must be created, it needs regulatory oversight. From the description in the article, it doesn't appear that there will be enough regulatory oversight to ensure that the ULA doesn't take advantage of its market power.

    Posted by on Wednesday, October 4, 2006 at 02:16 AM in Economics, Market Failure, Regulation | Permalink  TrackBack (1)  Comments (7)

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    » Lockheed-Boeing Joint Venture Approved from Antitrust Review

    Yesterday, the FTC, approved the formation of United Launch Alliance, L.L.C. (ULA), a proposed joint venture between The Boeing Company and Lockheed Martin Corporation.  ULA is a combination of the only two suppliers of U.S. gove... [Read More]

    Tracked on Wednesday, October 04, 2006 at 02:52 PM


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