Justice, FTC Economists Say FCC Should Avoid Static Definitions in Broadband Plan

“In many regions of the country, Internet users can choose from at most two wireline broadband access service providers and perhaps one or more wireless providers,” said FCC Chief Economist Jonathan Baker, framing the discussion at the session. The FCC needs to ask a number of central questions, he said: “Do broadband access providers exercise market power? Can and should we encourage entry and competition in the provision of broadband services? And what regulatory strategies should be deployed in markets that may not be competitive soon?”

The FCC naturally wants to “define the market” and “define what broadband is,” and there’s a tendency to rely in part on the Justice Department’s horizontal merger guidelines, Shapiro said. “I would just issue a preliminary warning against doing that,” he said. “In this area, where there’s new technology coming, and potentially, we hope, additional competition from wireless, the question in terms of exclusionary conduct … is whether it would prevent the prices from falling.”

Shapiro noted that broadband is “a moving target” and difficult to define. “Defining it in a certain way as one to three Mbps or whatever, that’s very static by nature,” he said. “It creates artificial boundaries, particularly given the need to look ahead.” It makes more sense to “track usage and availability across the different bands and then see how that moves,” he said. “Then you can ask questions like are the adoption rates at faster speeds of broadband being delayed because of affordability or deployment or lack of competition, rather than taking snapshots.”

Shapiro said the FCC should avoid drawing any conclusions about whether various parts of the broadband market are competitive. “It’s not yes or no,” he said. “Particularly if we're not talking about price regulation but we're talking about other things like spectrum availability, the question is how much more competition can you bring. What would be the benefits of more spectrum. Not whether the market is or is not classified as competitive to begin with.”

Shapiro said it’s difficult to assess the effect on the market of new wireless competitors like Clearwire. “It’s premature to really predict exactly how that’s going to play out,” he said. “It’s still early days.” Staff of the Antitrust Division tend to view two competitors in a market as better than one and three as better than two. “We like bigger numbers I guess,” he said. “That’s somewhat doctrinal, but it’s evidence based. We know from cellphone experience there were significant benefits to going from two to three and four” competitors.

Shapiro said he did find troubling preliminary information released by the FCC at its recent update on the broadband report that 50 to 80 percent of homes may get broadband speeds they need from only one provider. “I'm interested in learning what’s behind that statement, if it’s true,” he said.

Joseph Farrell, director of the Bureau of Economics at the FTC, agreed with Shapiro that the FCC should not focus too much attention on what constitutes broadband. “A good antitrust practice tries to remain aware that market boundaries are often somewhat fuzzy,” Farrell said. “Sometimes in regulatory policy debates there is somewhat paradoxically a tendency to act as if the definition were the end of the discussion.”

Even narrowband service may compete for some consumers, Farrell said. “More importantly, perhaps, not all broadband services are equally substitutable for all consumers,” he said. “One should pay attention to that.” Farrell said in assessing who gets subsidies for broadband, “the more one resists giving too much power to a definition, the better off we are.”

Farrell cautioned against making sweeping conclusions about broadband markets in the report. “It’s rare in antitrust, I think, for someone to ask is this market competitive or monopolized,” he said. “In telecom policy, perhaps partly because of the history of regulated natural monopoly, where in some specific sectors -- as in customer premises equipment -- there was a conscious and explicit decision that this sector is going to be competitive while the rest is a regulated monopoly, I think there’s sometimes a tendency to go to far in the direction of saying ’this one’s competitive. This one’s a monopoly.'”

Farrell also cautioned the FCC against imposing price regulation. “Although it’s far from perfect competition, there’s a reasonable amount of competition in at least many markets,” he said. “You probably wouldn’t gain all that much by way of lower prices for consumers.”

Farrell also said consumer information is a critical but difficult issue that should be looked at closely by the FCC. “In order for the demand curve to shift up in response to a quality improvement, consumers have to know about that quality improvement, in order for a demand curve to shift down in response to a restrictive management practice consumers have to know about it,” Farrell said. “Disclosure is not always appealing to those who are doing the marketing and even if it’s appealing it’s not an easy thing to do.”

Regulators in complex markets have to ask more questions than just is information buried in the fine print, Farrell said. “Not everything can be prominently disclosed,” he said. “If everything is in 14-point type, it really doesn’t help.”

Judith Chevalier, professor in the Yale School of Management, said the FCC should pay close attention to why carriers bundle service as it examines broadband competition. “As economists we may be interested in what is the effect of these bundling strategies of the firms in these industries,” Chevalier said. “One of the things we might want to look at, to try to measure, is whether these bundling strategies are helpful to consumers or whether these bundling strategies are harmful to consumers or whether these bundling strategies mask situations in which prices or products may be difficult to obtain on a stand-alone basis.”

Carriers in some cases “may be willing to separate customers who are willing to pay a lot for one thing and a little for the other and allow the firms selling the goods to extract a little more profit if they bundle than if they don’t bundle,” she said. “The reason we might worry about bundling or tying is situations in which a bundle or tie takes place in order to exclude some kind of competition from a rival.”