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Last week, Arthur Brooks blogged about my new paper on competition in broadband markets, noting that the economic power associated with pervasive regulation often leads to regulatory capture and “crony capitalism.”
In a famous 1959 article, Ronald Coase called out the Federal Communications Commission for letting political pressures affect the allocation of valuable broadcast licenses. More than 50 years later, not much has changed. Looked at through a Coasian lens, for example, one can’t help but notice that the Commission’s net neutrality rules have both the purpose and the effect of subsidizing internet “edge” companies at the expense of both consumers and internet ISPs. Not surprisingly, “edge” companies pushed hard for the rules, both at the FCC and on the larger political playing field, while ISPs resisted, and continue to do so.
Indeed, the express purpose of the net neutrality regulations is to force ISPs and consumers to subsidize “edge”’ firms by allowing them the free use of the ISPs’ networks, thereby increasing edge companies’ profits. Net neutrality advocates like Tim Wu make clear the goal is to “subsidize content,” even while acknowledging consumers may be harmed. In an article cited by the FCC in its Notice of Proposed Rulemaking, Wu wrote that:
Of course, for a given price level, subsidizing content comes at the expense of not subsidizing users, and subsidizing users could also lead to greater consumer adoption of broadband. It is an open question whether, in subsidizing content, the welfare gains from the invention of the next killer app or the addition of new content offset the price reductions consumers might otherwise enjoy or the benefit of expanding service to new users.
Similarly, Nicholas Economides’ work on the economic impact of net neutrality regulations—also cited by the FCC—concludes that removing net neutrality regulations would benefit consumers and harm content providers:
Comparisons between outcomes under the private equilibrium with two-sided pricing and the private equilibrium under net neutrality regulation indicated that a removal of net neutrality regulation would lead to a lower subscription price for consumers, but less content available due to an increase in fees to content providers. Content providers are worse off in the aggregate, while consumers are better off.
The FCC Commissioners who voted for the Net Neutrality Order did so explicitly on the grounds that it would increase edge providers’ profits. For example, the Order specifically finds that allowing ISPs to charge fees “could reduce the potential profit that an edge provider would expect to earn from developing new offerings….” And while the Commission refused to explicitly admit that its rules would harm ISPs, there was no absence of evidence on this point. In his dissent, for example, Commissioner McDowell referred to the effect on a small Montana ISP, LARIAT networks.
LARIAT has told the Commission that the imposition of network management rules will impede its ability to obtain investment capital and will limit the company’s “ability to deploy new service to currently unserved and underserved areas.”
Commissioner Baker went further, stating in her dissent that in issuing the Order:
The Commission puts its thumb on the scale as to where innovation in the Internet economy will be focused, and how future networks will be financed. The Order repeatedly expresses concerns about the significant consequences to Internet edge companies if their incentive to innovate, invest, and compete is chilled. The majority ignores the same grave consequences of government action chilling the networks’ analogous incentives to innovate, invest, and compete.
Finally, in addition to transferring profits, the net neutrality rules also effectively transfer political power. As Commissioner McDowell said:
Using these new rules as a weapon, politically favored companies will be able to pressure three political appointees to regulate their rivals to gain competitive advantages. Litigation will supplant innovation. Instead of investing in tomorrow’s technologies, precious capital will be diverted to pay lawyers’ fees. The era of Internet regulatory arbitrage has dawned.
In short, the net neutrality rules set out to distort competition in order to benefit one group of companies and disadvantage another—the very definition of crony capitalism.
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