Entrepreneurship and the Firm

Entrepreneurship and the Firm

Austrian Perspectives on Economic Organization

Edited by Nicolai J. Foss and Peter G. Klein

While characteristically ‘Austrian’ themes such as entrepreneurship, economic calculation, tacit knowledge and the temporal structure of capital are clearly relevant to the business firm, Austrian economists have said relatively little about management, organization, and strategy. This innovative book features 12 chapters that all seek to advance the understanding of these issues by drawing on Austrian ideas.

Chapter 10: Telecommunications Mergers and Theories of the Firm

Jerry Ellig

Subjects: business and management, entrepreneurship, economics and finance, economics of entrepreneurship, industrial organisation


Jerry Ellig Since the late 1990s, an unusual number of large telecommunications mergers were announced and consummated in the United States. Mergers span the range of the industry, including deals joining large local telephone, longdistance telephone and cable television companies. Why did managers pursue these mergers? The two most common explanations are a quest for market power, and/or a quest to enhance efficiency by capturing economies of scale and scope. Agency theory suggests that mergers may occur either because managers are engaged in personal empire-building at the expense of shareholders, or because mergers facilitate the transfer of corporate control to a new management team that believes it can outperform the old management team. Resource-based theories of strategic management imply that mergers will occur when they facilitate the creation or recombination of distinctive capabilities that confer competitive advantages. Finally, transaction cost theory posits that mergers are likely to occur when the existence of transaction-specific investments creates a risk of opportunism, or when the costs of engaging in knowledge transactions are high. Some, all or none of these theories may explain managers’ expectations about recent high-profile telecommunications mergers. Because the Federal Communications Commission (FCC) claims authority to review these mergers, there is a vast quantity of evidence on the public record that can aid researchers in ferreting out the most likely explanations. This study examines six of the largest and most publicized mergers to see which theories of the firm most likely pinpoint the motivations for merger. MERGER HYPOTHESES Market Power Market...

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