Democracy & Technology Blog “Workably” competitive

Michael J. Copps

Everyone agrees competition beats regulation, but we’re always told things aren’t competitive enough yet to justify deregulation.

If eventually we develop a truly competitive marketplace with consumers enjoying broadband speeds like those available to our counterparts in other industrial countries, we can step back and rely on the genius of that marketplace.

The words of FCC Commissioner Michael J. Copps. When they say “truly competitive,” I think people like Commissioner Copps have in mind the textbook definition of “perfect competition” (many suppliers in the market, each supplier so small that its actions have no impact, the product all of the suppliers provide is the same, all agents have perfect information, all firms have acces to all production technologies and any firm may eneter or exit the market as it pleases), though they would never admit it. Luis M.B. Cabral describes perfect competition in Introduction to Industrial Organization. Cabral also says it doesn’t exist, and that if it did suppliers would have zero profits. What investor is going to sign up for that?
A group of 16 prominent economists who, I guess, don’t want to marginalize themselves in this debate by taking sides, are saying that the broadband market is “workably” competitive.

While not all geographic markets are served yet by multiple broadband providers, the data suggest that broadband markets are, in general, dynamic and competitive. By December 2005, according to the FCC’s latest statistics, 93 percent of all zip codes in the U.S. had two or more broadband providers, and 82 percent had three or more. Just because a zip code has multiple providers does not mean that those providers compete directly, so whether “enough” firms compete yet is debatable; the trend, however, is positive. Furthermore, consumers are making greater use of new technologies. Mobile wireless use went from fewer than half a million subscribers in 2005 to more than 10 million subscribers in 2006. In short, more people are getting served by more providers and more platforms.
Consumers are benefiting from this competition. For example, between 2001 and 2005, the average price of a digital subscriber line dropped by about one-third. In the case of cable, the quality-adjusted price declined significantly, as cable connection speeds increased significantly while prices held steady.
In most, but not all, cases, we believe these markets are workably competitive. Moreover, even if some service providers could exercise some market power, the multi-sided nature of the market means that they still have powerful incentives not to block content. In particular, providers need content in order to attract subscribers. If a provider restricted access, its product would be less valuable and attract fewer subscribers. The point is that even firms with market power in one part of the market will not necessarily be able to control content.

The economists are: William J. Baumol, Martin Cave, Peter Cramton, Robert Hahn, Thomas W. Hazlett, Paul L. Joskow, Alfred E. Kahn, Robert Litan, John Mayo, Patrick A. Messerlin, Bruce M. Owen, Robert S. Pindyck, Vernon L. Smith, Scott Wallsten, Leonard Waverman and Lawrence J. White. Their paper is here.
John W. Mayo offers something similar:

Another relevant dimension of the prequel is whether the supply of broadband is now, or is likely to be, subject to anticompetitive activity. A dispassionate reading of either the history or current status of the telecommunications industry suggests that we ought not to rely solely on laissez faire ideology to assure that the benefits of competition are fully realized. At the same time, the present trends that include rapidly rising output and declining prices are reassuring. It is also, or should be, therefore, calming that no less than three federal agencies (the Department of Justice, the Federal Trade Commission and the Federal Communications Commission) have telecommunications industry oversight responsibilities under existing laws. Collectively, these agencies may, and ought to, set regulatory requirements that are “in the public interest,” prevent “contracts, combinations or conspiracies in restraint of trade,” and prevent “unfair methods of competition.”

Whether a “competitive” market is around the corner or whether it’s already here, at least we agree there’s nothing to justify net neutrality regulation.

Hance Haney

Director and Senior Fellow of the Technology & Democracy Project
Hance Haney served as Director and Senior Fellow of the Technology & Democracy Project at the Discovery Institute, in Washington, D.C. Haney spent ten years as an aide to former Senator Bob Packwood (OR), and advised him in his capacity as chairman of the Senate Communications Subcommittee during the deliberations leading to the Telecommunications Act of 1996. He subsequently held various positions with the United States Telecom Association and Qwest Communications. He earned a B.A. in history from Willamette University and a J.D. from Lewis and Clark Law School in Portland, Oregon.