Dynamic Competition in Internet Sector

Originally published by The Hill here. One of public policy experts’ justifications for government intervention in the Internet sector is that there is an inherent market failure – what economists […]

Originally published by The Hill here.

One of public policy experts’ justifications for government intervention in the Internet sector is that there is an inherent market failure – what economists call a monopoly – that Washington needs to fix. Despite the debate amongst academics and economists about the existence of such market conditions, proponents of new government regulations, such as those now being proposed by the FCC, frequently suggest that “everyone knows” telecom companies are monopolists (even though the very existence of multiple competitors negate the possibility of a monopoly, but more on that later). Regulators and legislators shouldn’t so easily concede this point, nor should they fold to any demands based on the premise.

Although it may be a good advocacy strategy to equate detractors’ views to those of the Flat Earth Society, there is good academic debate about whether monopolistic conditions exist in a number of markets in which the public so commonly assumes that they do. Even when we know a monopoly exists, what makes it a public policy concern is how responsive consumers are to price changes (called elasticity in your Econ 101 course). If consumers continue to purchase a good regardless of its price, it might be in the public’s interest for the government to check a monopolist’s power before we’re all sent to the poor house. However, if numerous alternatives exist, whether as competitors or even goods that serve as substitutes, prices and other consumer concerns can be kept in check.

One such example exists in the cable industry. Many assume that local cable providers act as a monopoly and can raise rates to whatever level they want, while offering whatever kind of customer service they feel like. But even if your cable provider is the only one in town, they know you can easily switch to satellite, over-the-air TV, your increasingly obsolete DVD player, YouTube via your smartphone, or (this will be hard to understand for most) not watch TV at all. The competition you’d like to see might not exist, but competition does exist nonetheless.
Considering market competition among Internet Service Providers (ISPs) brings us back to the debate about the need for increased regulatory oversight, specifically through developing proposals at the FCC and a new bill introduced in Congress by Sen. John Thune (R-S.D.). The crux of the rationale for the need for more regulation – “Title II reclassification” in the case of the FCC proposal – revolves around whether there is enough competition to keep companies from having too much control over Internet services to your home, business, or business’ customers.

Do ISPs operate as monopolists with unchecked market power? Even if a cable company does operate in a small market in which they are the only ISP, substitutes also keep them in check. Digital satellite and high speed internet over the phone has proliferated to the point where virtually everyone has an option. Libraries, internet cafes, and private business’ free Wi-Fi hotspots, or even municipalities offering free Wi-Fi are substitutes that keep “big cable” in check. And thousands and thousands of wireless internet service providers (WISPs) are popping up all around the country, either increasing competition that puts downward pressure on market prices, or filling the gaps where the major players are not willing to invest. Add to this Google and SpaceX’s plans to cover the planet with wireless internet, and the problem for cable companies may soon be that there is too much competition.

Up to this point, a relatively free market is doing a decent job of ensuring that monopolies don’t exist, while technological innovations are ensuring that oligopolies are even becoming a thing of the past. Whether oligopolistic or not, what is the best response the government can have to ensure economic efficiency, while simultaneously protecting consumers and preserving competition and the capitalistic economy which made America the largest and strongest economy on Earth? (Hint: it’s not more regulations that cable companies, AND all of its new competitors, must comply with.)

In this situation, the most economically efficient response we can offer is not to increase the regulatory burden on ISPs, but to free the market. It’s a matter of basic economics. If your argument is that big ISPs “can do what they want” because competition has been limited due to the existing barriers to entry (e.g. infrastructure investment for startups), adding additional regulations is counterproductive, and will actually increase the numberis of hurdles that a new entrant must jump to compete. The thousands of little WISPs and other providers will have less interest (i.e. economic incentive) in coming to a neighborhood near you.

Making the argument that the problem with companies who offer Internet service is that they have too little competition, can’t be solved by decreasing the opportunity for a solution. Asking the FCC, or Congress to impose more robust, or even antiquated regulations (the FCC will vote on ISP reclassification under the 1934 Communications Act in February), will inevitably create the problem they are most concerned about, will inhibit market forces from operating to serve the consumer, and will further limit economic opportunities for millions of citizens who rely on Internet business-related opportunities.

Vélez-Hagan is an economic policy researcher at the University of Maryland-Baltimore County, the founder of The National Puerto Rican Chamber of Commerce, and author of the upcoming book, The Common Sense behind Basic Economics (2015). @JVelezHagan