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Democracy & Technology Blog FCC following EU precedent

The FCC has settled on an inappropriate definition of what constitutes a competitive market. A memorandum explaining why the FCC denied the Verizon’s forbearance petition seeking deregulation in Boston, New York, Philadelphia, Pittsburgh, Providence and Virginia Beach suggested it’s because Verizon’s market share has to be less than 50% AND Verizon’s competitors must have ubiquitous overlapping networks with significant excess capacity.

While there is some evidence in the record here regarding cable operators’ competitive facilities deployment used in the provision of mass market telephone service in the 6 MSAs at issue, we find that it does not approach the extensive evidence of competitive networks with significant excess capacity relied upon in the AT&T Nondominance Orders … where the Commission has found an incumbent carrier to be nondominant in the provision of access services, it had a retail market share of less than 50 percent and faced significant facilities-based competition. (footnote omitted)

A market share in excess of 50% would justify regulation in the EU, but not in the U.S. pursuant to settled antitrust principles.
J. Bruce McDonald
, formerly Deputy Assistant Attorney General
 with the Antitrust Division
, explains:

EU law seeks to control the conduct of firms that are dominant, while U.S. law addresses monopolies, the creation or maintenance of monopoly power. Take this practical comparison of market share thresholds. The dominance standard ­ the power to behave to an appreciable extent independently of competitors, customers and ultimately consumers allows a presumption of dominance where a single undertaking holds 50% or more of the market, and less may be enough. The U.S. standard – the ability to raise price and exclude competition – would rarely be proved where market share is less than 70%. Of course, neither jurisdiction relies solely on market share evidence. (footnote omitted)

The FCC memorandum doesn’t disclose Verizon’s market shares. However, I suspect it is less than 50% in one or more places or the memorandum wouldn’t make it so clear that even a market share below 50% won’t justify deregulation unless competitors have ubiquitous overlapping networks with significant excess capacity like MCI and Sprint did in the long-distance market of the mid-1990s.
The U.S. doesn’t regulate dominant companies like the EU and the FCC because it doesn’t make any sense. If there is rising demand, other providers will enter the market. They will be successful if they offer better service or a superior product, or competitive pricing. If competitors can’t figure out how to differentiate themselves in the market, they tend to hire former FCC staffers to importune their former colleagues to bestow regulatory advantages on the hapless competitors. That’s called “competitor welfare,” and it leads to higher prices for consumers and diminished innovation.
If Verizon has a market share below 50% or even in the 50% range, the FCC would do well to recall what Alan Greenspan says:

It takes extraordinary skill to hold more than fifty percent of a large industry’s market in a free economy. It requires unusual productive ability, unfailing business judgment, unrelenting effort at the continuous improvement of one’s product and technique. The rare company which is able to retain its share of the market year after year and decade after decade does so by means of productive efficiency — and deserves praise, not condemnation.

In other words, even if the FCC didn’t exist, it would be nearly impossible for Verizon or anyone else to sustain a market share above 50%. Greenspan continues:

The Sherman Act may be understandable when viewed as a projection of the nineteenth century’s fear and economic ignorance. But it is utter nonsense in the context of today’s economic knowledge. The seventy additional years of observing industrial development should have taught us something. If the attempts to justify our antitrust statutes on historical grounds are erroneous and rest on a misinterpretation of history, the attempts to justify them on theoretical grounds come from a still more fundamental misconception.

The FCC isn’t ignorant. It’s just trying to help its friends, who it hopes will one day return the favor. It’s an incestuous little world.

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.