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What does economics say about updating the Communications Act?
There has been a lot of what some might call “fake news” regarding telecommunications policy recently. Senate Democrats tweeted that the internet will slow to a crawl if the Federal Communications Commission’s (FCC) Restoring Internet Freedom Order stands, earning them three Pinocchios from The Washington Post. The Los Angeles Times also claimed that the FCC’s actions will “end the internet as we know it.”
Falsehoods too often lead to bad decision-making. So while Congress is considering whether to overrule the FCC’s vote, to write a new Communications Act, or both, it would be good to review what leading economic research has said about the issues.
Research conclusion one: Regulations prohibiting fast lanes generally harm consumers.
What researchers show this? Nicholas Economides (New York University) and Joacim Tåg (Research Institute of Industrial Economics, Sweden) show in a 2012 paper that consumers are worse off with fast-lane prohibitions. Shane Greenstein (Harvard University), Martin Peitz (Universität Mannheim), and Tommaso Valletti (Imperial College London) in a 2016 article show that such restrictions result in higher consumer prices for internet services.
Research conclusion two: Regulations prohibiting fast lanes generally harm the economy.
What researchers show this? Benjamin Hermalin (University of California, Berkeley) and Michael Katz (University of California, Berkeley, and also a former FCC chief economist) in a 2007 paper; Jay Pil Choi (Michigan State University) and Byung-Cheol Kim (Georgia Institute of Technology) in a 2010 paper; and Kevin Caves (Navigant Economics), whose 2012 article uses the Economides and Tåg 2012 analysis to show that the regulations decrease total welfare under the most common market conditions.
Research conclusion three: Regulations prohibiting fast lanes may lower network investment and content provider investment in some situations, but may not in others.
What research is in this space? Choi and Kim in their 2010 paper find that whether fast-lane prohibitions lower network investment or not depends on the value that some content providers might place on faster delivery speeds. Economides and Hermalin in a 2012 paper find that the effect of regulations on network investment depends on how the fast lanes are provided. Marc Bourreau (Telecom ParisTech), Frago Kourandi (Athens University of Economics and Business), and Valletti find that the regulations decrease broadband investment in a 2015 paper. In their 2007 paper, Hermalin and Katz find that the regulations reduce the number and variety of content providers. In their 2015 paper Bourreau, Kourandi, and Valletti find that the regulations lower content innovations. But Greenstein, Peitz, and Valletti in their 2016 paper describe how an internet service provider (ISP) might price in a way that excludes some lower-end content providers.
Research conclusion four: Blocking harms customers if it keeps them from doing legal things that they want to do.
It seems obvious that it is harmful to consumers to stop them from doing things they want to do, that are legal to do, and that they are willing to pay for, but some researchers addressed this anyway — namely Economides and Hermalin in their 2012 paper and Greenstein, Peitz, and Valletti in their 2016 paper.
What can Congress do?
The research shows that net neutrality should not be considered an all-or-nothing proposition: Sometimes non-neutral acts benefit the public, and sometimes they do the opposite. Unfortunately, the FCC’s 2015 decision was an all-or-nothing approach, which appears to ensure maximum harm.
Congress can provide a regulatory system that consistently benefits consumers and the economy if it focuses on what consumers should have the right to do rather than on outlawing business models that are sometimes beneficial. A customer-centric approach would empower customers, whether they be consumers or content providers. Such an approach could apply the following principles, which have some parallels with the four internet freedoms advocated by former FCC Chairman Michael Powell:
- Principle one. Customers should be allowed to purchase any internet service from anyone who is willing to provide it anytime, anywhere. This should remove all legal barriers to competition and to innovation while accepting that local governments cannot limit customers’ choices by crowding out private investors.
- Principle two. Customers purchasing broadband access should be able to choose a service that allows them access to all legal content. This is broader than Principle 1 in that it would seek to ensure that customers always have a no-blocking option, which most appear to want. It allows consumers who want to receive less to choose that if it is better for them and an ISP is willing to provide it. For example, limited access might be more economical for some consumers, or a consumer might want limits on what others can do if they gain access to the consumer’s connection.
- Principle three. Customers should be fully informed as to what they are buying.
The research says that customers should be allowed options that make economic sense. Focusing on customer rights to choose will give them more power and more options than did the FCC’s 2015 decision, which limited customer choices.