This article is from the archive of our partner National Journal

Federal regulators are feeling pretty good about their decision to scare Sprint away from trying to buy T-Mobile.

The two companies never actually applied to merge, but in early August, they abandoned their long-running talks due to obvious resistance from the Federal Communications Commission and the Justice Department. Top officials at both regulators made it clear they believed that reducing the number of nationwide cellular carriers from four to three would stifle competition and mean higher prices for customers.

Soon after giving up on the deal, both companies started to slash prices in attempts to steal away each other's customers.

The price cuts may seem to validate the government's decision to prevent a deal, but it's not yet clear whether the competition is sustainable. Many Wall Street investors are skeptical that Sprint and T-Mobile can keep up the price cuts as industry giants Verizon and AT&T soak up most of the profits.

Sprint and T-Mobile had argued that a merger was the only way to compete on equal footing with Verizon and AT&T. The two larger carriers have better networks, as well as the revenue to keep upgrading to appeal to high-end customers who demand strong wireless connections wherever they go.

But when Sprint and T-Mobile executives met with FCC and Justice Department officials to float the possible deal, they were met with heavy skepticism.

The Obama administration blocked AT&T's attempt to buy T-Mobile in 2011, arguing that maintaining four independent carriers was necessary for a competitive market. Although Sprint is much smaller than AT&T, regulators took a similar position on its possible bid to buy the smallest of the four carriers.

Sprint and T-Mobile eventually acknowledged the reality that they had little chance of convincing regulators to change their minds.

FCC Chairman Tom Wheeler wasted no time in congratulating Sprint and T-Mobile for making the right decision.

"Four national wireless providers is good for American consumers," Wheeler said in a statement after the companies gave up on the merger. "Sprint now has an opportunity to focus their efforts on robust competition."

After the announcement, Sprint appointed a new CEO, Marcelo Claure, who quickly started slashing prices. The company unveiled new data-heavy family plans for $100 a month and offered up to $350 to customers who switched from rivals.

T-Mobile shot back with higher data limits for certain plans and incentives to get existing customers to convince their friends and family members to switch from competitors.

John Bergmayer, an attorney for consumer advocacy group Public Knowledge, said the price cuts "show that competition is what's good for consumers, not consolidation."

"From the FCC's perspective, you can't paint a better scenario than what Sprint is doing right now," said Paul Gallant, a policy analyst for Guggenheim Partners, adding that it's reasonable to assume that the price cuts "directly flow" from the death of the merger.

But Gallant cautioned that it's too soon to know whether regulators made the right decision.

"Nobody was arguing that in three months they wouldn't be able to compete," he said of the two smaller providers. "Longer-term, Wall Street is unsure whether this aggressive pricing strategy will let Sprint and T-Mobile survive."

Verizon and AT&T each have about a third of all U.S. wireless subscribers, while Sprint and T-Mobile split the remaining third, along with some small regional carriers. T-Mobile has been gaining recently, while Sprint has continued to lose subscribers.

The two largest carriers are especially dominant in the competition for the highest-paying customers.

Paul de Sa, an industry analyst for the firm Sanford C. Bernstein, said Sprint and T-Mobile have little hope of taking on the industry leaders in the short term.

But that doesn't mean they can't survive, he said. The companies can continue to compete head-to-head for customers who care more about getting a good deal than having the best network.

"Like in any industry, you can have different players targeting different segments," de Sa said. "And it seems like there's probably room for at least one or two players who are targeting the more value-conscious segments."

This article is from the archive of our partner National Journal.

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