Effective Competition and Concentration – A New Study on the Information Technology Market

Antitrust laws exist to protect consumers from predatory monopolies.  The government’s watchful eye against anti-competitive behavior expresses only good intentions toward the protection of both markets and consumers.

Of course, there is a downside.  Regulators happen to be human, and sometimes they mess things up.  That’s the premise of an intriguing study from Dr. Jeffrey Eisenach of Navigant Economics.  

Eisenach argues that the government has been focusing on the wrong thing all along, and that rather than regulating broadband ISPs and content transmission, the real game is all about the “platform.”  The entire platform: applications, content, devices, and communications channels, are what companies are actually looking at.  They’re attempting, to view the system holistically; while regulators think a piece of the puzzle is the whole picture.

Broadband is a dynamic market, where users can be charged different prices for different methods of access.  Broadband has a high level of modularity, that “broadband products and services are comprised of complementary inputs, which may be assembled by the consumer, by the producers of the complements, by third parties, or by a combination of each.”  The components can be mixed and matched, “facilitating interaction between complementary computer products.”  And this also occurs on the demand-side of the equation, a principle called “network effects,” by “facilitating interactions between advertisers and readers.”

Rather than taking an aggressive stance toward regulating broadband–as the present administration is hell-bent on doing through the Federal Communications Commission (FCC)–Eisenach suggests that “the dynamism and complexity of broadband markets, and their interrelatedness with other elements of the Internet ecosystem, argue strongly against the sort of industrial-policy-oriented, ex ante regulation of the type practiced by the FCC.”

Eisenach essentially argues that the aggressive antitrust approach the government has adopted is not unexpected.  Certainly, broadband markets (both wired and wireless) look remarkably concentrated.  

Wired broadband networks have an impressive amount of sunk cost, a market apparently difficult to break into.  As Eisenach points out, wired broadband has been yclept a “cozy duopoly.”  Wireless fairs no better.  Indeed, in 2010, the FCC took the rare step of declaring the wireless broadband market as not effectively competitive, at least in part as a result of concerns about continued industry concentration.

Yet, broadband actually exhibits all of the elements of a sharply competitive market, including “falling prices, expanding output, [and] rapid innovation.”  As a result, Eisenach asserts, U.S. broadband penetration skyrocketed from less than 20 percent in 2003 to nearly 70 percent in 2010.  Furthermore, U.S. broadband is extremely competitive globally, topping the charts in 4G adoption and second only to the Swiss in broadband connection speeds.  

So, where does this leave us?  

It leaves us in some danger of smothering the market if broadband regulation is left to the tender mercies of the FCC’s penchant for “ex ante regulation” rather than “ex post antitrust” actions.  Inappropriate regulation could result in “taxation by regulation,” destroying (and not creatively), new products and services.  

If Eisenach is right that the real key to understanding broadband is the “platform,” then we will, in the interest of promoting “competition” and “public interest,” we will achieve neither.  

Consumers deserve better.

 

Zac Morgan currently attending George Mason University School of Law and is a blogger for the American Consumer Institute.

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