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Scholarship The Internet is a fabulous means of communication. However, the Digital Fuel Monitor by Rewheel/research is a prime example of misinformation on the Internet
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The dissemination of false information online has become a serious challenge. Adding to this problem are the false claims put forth by Rewheel.
The Internet is a fabulous means of communication. However, the Digital Fuel Monitor by Rewheel/research is a prime example of misinformation on the Internet.[1] To curb the spread of false information, social media platforms have started applying warning labels to content they believe the facts do not support. Still, far too many false claims have attracted attention because separating fact from fiction on the Internet often requires a specific expertise. In this paper, the authors apply their expertise about mobile wireless markets to expose the false claims put forth by Rewheel/research in the recent publication of its Digital Fuel Monitor. We find the Rewheel rankings to lack academic rigor owing to an unsuitable analytical concept, unrealistic assumptions, and the omission of marketplace realities. Counterintuitive results confirm the rankings’ ineptness.
Rewheel, a Finnish consultancy, periodically issues reports that it portrays as international competitiveness comparisons of retail prices for mobile wireless services across the globe; however, these comparisons are not accurate representations of the state of competition in the mobile wireless world. In these reports, Rewheel assigns providers and countries international ranks and various competitive labels. For example, Rewheel ranks a country with alleged high prices a laggardand considers itleast competitive. Conversely, countries that Rewheel views favorably obtain a most competitive ranking. As with much of the information on the Internet, Rewheel follows the freemiummodel. That is, it publishes attention grabbing headlines and some colorful charts for free, but anyone seeking to understand more about the derivation of the data must pay Rewheel’s fees for the full content.
Mirroring much of the free content on the Internet, Rewheel’s rankings are unscientific and erroneous. Unfortunately, this contributes to the spread of misinformation about the state of competition in mobile wireless markets. Rewheel should be subject to the same warning labels as those placed on other suspicious information. Before turning to the shortfalls of the Rewheel rankings, we highlight that valid inferences regarding the competitiveness of mobile wireless service provisioning in a country cannot be made from a simple, unadjusted ranking of international prices. Countries differ in many aspects including network quality, consumer preferences, income, regulatory and legal environment, factors of production costs, and market size. These and many other differences among jurisdictions contribute to price variations. A proper international comparison considers these factors and compares the value proposition not simply prices.
In its recent ranking exercise, Rewheel ranks providers and countries by purportedly averaging the retail prices of 10 retail service plans. The 10 plans include five smartphone plans on 4G or 5G networks with varying levels of voice allowances, data allowances, and download speeds. Rewheel also includes three mobile broadband data-only plans and two home broadband (fixed wireless) plans. This exercise finds an average of €109 (US$127) for Canadian mobile wireless providers TELUS, Bell, and Rogers. Rewheel sweepingly declares that these providers offer “the least competitive monthly prices.”[2] With an average price of €29 (US$34), Finnish provider Elisa wins Rewheel’s distinction of offering “the most competitive … monthly prices.”[3] The Rewheel story is easy to understand. It is also completely wrong.
Rewheel bases its rankings on a meaningless concept that offers no economic market insights.
Comparing the prices of a collection of products (baskets) is not new. Prior to the introduction of the Internet, analysts used basket prices to compare supermarket prices. That is, they compared the costs of identically filled shopping carts across supermarkets. However, Rewheel’s application of the basket method is not appropriate for comparing prices of different mobile wireless services. Rewheel created its own version of the basket method that includes the calculation of meaningless averages, random combinations of different services, improper assumptions, and factual errors. Not surprisingly, as evidenced by the results derived by Rewheel, the rankings are incorrect and counterintuitive. We find Rewheel’s rankings are of no value in comparing prices and assessing the level of competition in wireless markets.
Comparing total grocery bills for two identical shopping carts from two different supermarkets might be a rational approach. However, knowing the average price of the items in the shopping cart clearly is useless especially when including a wide range of items. Nevertheless, Rewheel does just that – it compares average prices across varying items (in this case services). Knowing that the average price of a certain T-Mobile USA smartphone, tablet, and home Internet plan is €106 (US$125) is about as useless as knowing that the average price per item in a shopping basket containing a six-pack of beer, a dozen eggs, and a pound of oranges is US$10.
Rewheel’s assumptions are unsupported and create distorted rankings. Rewheel mixes prices from different providers and ignores market realities.
Rewheel does not explain why it would make sense to take the average of five smartphone plans, three data-only plans, and two wireless home Internet plans. Grocery bills are the sum of all items purchased at the supermarket. Presumably, consumers need all these items in their daily life. As such, the total grocery bill measures the household expenditure for food. Rewheel’s basket, however, does not represent anything. It does not represent an individual’s spending for mobile wireless services because subscribers do not need five smartphone plans. Subscribers also do not rely heavily on wireless home Internet access. Instead, the more prevalent means to access the Internet is through fixed broadband services offered by landline telephone and cable TV companies. Yet, fixed broadband services are missing from Rewheel’s basket. Thus, the average of Rewheel’s eclectic mix of services is meaningless. It certainly does not represent a consumer’s wireless spending, and it does not represent the average price of a particular service. Rather, the Rewheel basket is a mix of substitute and complementary items. Moreover, Rewheel’s basket overlooks an important item (fixed broadband) on a consumer’s shopping list.
The must-carry assumption. Rewheel assumes that in order for markets to be competitive all providers in the world mustoffer all 10 service plans in its basket. If a provider does not offer a specific plan, then that provider is “assigned the highest monthly price among all 168 operators.”[4] For example, per Rewheel, Vodafone in India does not offer a fixed wireless broadband plan with at least 1,000 GB of data and download speeds of 100 Mbps or faster. Therefore, under the must-carry assumption, Rewheel artificially increases Vodafone India’s price average by loading it with the highest observed international value for this plan. In this case, the highest monthly price that Rewheel found belongs to a provider in the United Kingdom by the name of EE Limited (formerly Everything Everywhere). Thus, Vodafone India’s average includes a plan price from the United Kingdom. Rewheel applies this exact price to no less than 133 of the 168 providers (79 percent) in its ranking.
Rewheel’s irrational assumption is akin to imputing that the price of buffalo meat in a vegetarian supermarket is the same as the price of the most expensive buffalo meat vendor in the world. There is no economic or statistical support for this approach. In fact, in some countries, Rewheel’s must-carry plans cannot even be offered because the regulator has yet to release 5G spectrum. Rewheel’s baseless assumption renders the comparison useless because the average price by which providers and countries are ranked is not composed of retail prices faced by subscribers in the respective markets.
The non-specialization assumption. Rewheel’s ranking unrealistically assumes that for a provider (and thus the market) to be competitive it must not specialize but must offer and compete on all plan levels selected by Rewheel. This assumption is counter to basic economic principles.
A rational business enterprise introduces service plans for the express purpose of earning positive economic profit. Based on this objective, an enterprise derives a strategy that determines its retail offerings. Unlike Rewheel’s assumption, this does not mean that all competing enterprises offer the same services. Quite the contrary, competitors seek to distinguish themselves from their peers through price and non-price service attributes and by offering new and innovative services to gain a competitive advantage.
Consider, for instance, Freedom Mobile Inc., a Canadian regional mobile wireless provider owned by Shaw Communications, a Canadian cable provider. Freedom does not offer fixed wireless broadband services. Rewheel incorrectly deduces from this observation that Freedom’s offerings are not competitive. Freedom is a profit-maximizing firm; therefore, its decision not to offer fixed wireless services is simply an indication that the service does not align with the company’s strategic blueprint. Freedom finds that it can best compete by specializing in offering mobile wireless services in select regions of Canada. Rewheel’s approach also overlooks service providers that mainly specialize in fixed wireless broadband, like Xplornet, which is not listed among Canada’s providers.
The standalone assumption. Rewheel incorrectly assumes that consumers demand and are supplied with standalone only plans. In Rewheel’s ranking system, there is no demand for bundled service plans where a consumer purchases mobile wireless service along with TV, fixed Internet, or fixed telephony services. However, in reality, many subscribers bundle their services and thereby receive discounts on mobile wireless and broadband services. Relatedly, mobile wireless providers offer bundled services to competitively distinguish themselves. For instance, AT&T offers free HBO Max subscriptions to some of its customers.[5] By ignoring bundled offerings and discounts, Rewheel overstates actual consumer expenditures.
The no-sharing assumption.The Rewheel ranking exercise also contains the untenable assumption that the increment of demand is always one mobile phone line and never more, which is false. For instance, AT&T offers unlimited plans starting at US$30 “when you get 5 lines.”[6] Rewheel ignores this US$30 price point. Instead, it uses a US$65 price point, which is AT&T’s lowest price for an unlimited plan with a single line.[7] Yet, as of 2015, an estimated 68 percent of US subscribers were part of a shared or family plan.[8] By ignoring the fact that subscribers purchase in increments of more than one line, Rewheel significantly overstates US prices.
Specifically, instead of the US$65 price assumed by Rewheel, the average price of AT&T’s cheapest unlimited plan is closer to US$41.[9] For this example alone, Rewheel’s assumption results in an overstatement of prices by 58 percent. The popularity of shared plans in the United States is not the exception. In Canada, approximately half of mobile wireless subscribers purchase a plan shared with others.
The price-only assumption.Rewheel’s incorrect ranking assumes that consumers only care about price and not what they get in exchange for their money. In building its average, Rewheel looks for the price of the cheapest plan that meets or exceeds its selection criteria.[10] The plans offered by different providers exceed the selection criteria by different amounts. Yet, Rewheel ignores this fact and creates an apples-to-oranges comparison where consumers do not care about anything but price. Omitting the value of additional minutes, data allowances, or faster download speeds is not realistic.
A real-world example illustrates the consequences of this baseless assumption. Koodo is a mobile wireless provider in Canada that is part of the TELUS family of brands. The cheapest Koodo plan that meets Rewheel’s criteria for its first plan (i.e., Smartphone: 4G&5G, 100 mins, 1 GB, 1 Mbps) is a plan priced at US$22.[11] Now, consider the Irish mobile wireless provider called 3 whose plan meets or exceeds the same Rewheel criteria and is priced at US$17.[12] Rewheel heralds 3 as a cheap provider and labels TELUS as “least competitive.”[13] Table 1 provides the details of these two plans.
As the table reveals, for an additional US$5 per month (not withstanding other differences), Koodo offers download speeds that exceed those offered by 3 by a factor of over four. By ignoring non-price service attributes, Rewheel assigns a least competitive label on Koodo and a most competitivelabel on 3, thereby incorrectly assuming that consumers do not care about network quality and that they would not be willing to pay for a higher speed. Presumably, Rewheel would also argue that consumers are not willing to pay more for high-grade Japanese wagyu beef than they would pay for a cheaper cut of beef.
The cost-equality assumption.Rewheel also ignores that building a network costs money. Rewheel unrealistically assumes that building a network in Finland (which Rewheel highlights as a competitive market) costs the same as building a network in Canada (which Rewheel highlights as a noncompetitive market) even though Finland has a population one-sixth the size of Canada and a landmass one twenty-ninth the size of Canada. Finnish mobile wireless providers also pay about 90 percent less for radio spectrum relative to their Canadian peers.[14] For a business enterprise to remain viable, it must recover its costs and earn a competitive return. Because all providers face buildout and spectrum costs, they are reflected in the retail prices for mobile wireless services. Yet, in Rewheel’s utopian world, all providers face the same costs.
Rewheel’s results are counterintuitive and confirm that a flawed concept and unreasoned assumptions guarantee incorrect findings.
The counterintuitive results.Two simple examinations demonstrate that Rewheel’s results are incorrect and offer no economic insight. First, we retraced Rewheel’s construction of the ranking average for one mobile wireless provider, that is, TELUS, a mobile wireless provider in Canada, which offers three brands – TELUS, Koodo, and Public Mobile. Examining the websites of the TELUS family of brands reveals that across the three brands TELUS only offers two of the 10 specific plans that Rewheel uses for its average. Specifically, as shown in Table 2, Koodo offers a plan at US$22.33 that meets and exceeds the first Rewheel plan (i.e., Smartphone, 4G&5G, 100 minutes, 1 GB, 1 Mbps). Koodo also offers a plan at US$55.81 that meets and exceeds the second Rewheel plan (i.e., Smartphone, 4G&5G, 1000 minutes, 10 GB, 10 Mbps). The TELUS brands do not offer any of Rewheel’s other eight specific plans although TELUS offers many other plans.
Rewheel ignores the fact that it misses 80 percent of the sample and simply substitutes the missing data points with “the highest monthly price among 168 operators.”[15] The data provided by Rewheel in its free Public Version on the Internet does not disclose what prices it used in every instance where a provider did not offer a plan. However, it is possible to ascertain that for the ninth plan (i.e., fixed wireless broadband plans with at least 1,000 gigabytes and 100 Mbit/s peak speed) Rewheel used US$88.37, which is the price for the most expensive plan that Rewheel found for this plan type. EE Limited in the United Kingdom supposedly offers this plan. For the sixth sample plan, Rewheel blends a price point of US$116.28 from Rogers, another Canadian mobile wireless provider, into TELUS’ average.
As the TELUS example demonstrates, Rewheel’s ranking is pure fiction. Aside from its theoretical failings and the fact that it misses the plans purchased by 50 percent of Canadians, Rewheel observes only two data points for TELUS, which average €34 (US$39). Based on Rewheel’s ranking, an average of €34 would put TELUS in third place out of 168 providers, which would appear to make it one of the most competitive mobile wireless providers in the world. However, Rewheel reports TELUS’ average at €109 (US$127), which is purely an artifact of Rewheel’s methodology that assigns TELUS the highest price for eight out of 10 sample plans – plans that TELUS does not even offer.
Second, in Rewheel’s world where only price matters, one would not expect providers with the most competitive monthly prices to be in the same market as providers with the least competitive prices. The reason for this is simple. Like any other rational economic agent, subscribers would not select a more expensive plan over an identical but less expensive plan. However, the myriad of unreasonable assumptions in Rewheel’s ranking produces this counterintuitive result.
Consider the case of Romania where Rewheel calculates average prices of US$69, US$70, US$122, and US$123 for Orange, Vodafone, RCS-RDS, and T-Mobile, respectively. In the same order, per Rewheel, these prices would rank the four providers as 23, 25, 141, and 146. This ranking presumably offers Orange and Vodafone a label of most competitive, whereas RCS-RDS and T-Mobile are least competitive. If the Rewheel price-only world were accurate, RCS-RDS and T-Mobile would not have sustainable business cases because Orange and Vodafone allegedly offer better prices and thus would attract all market demand. Nevertheless, the actual market shares in Romania tell a different story. RCS-RDS and T-Mobile have market shares of 12.6 percent and 18.7 percent, respectively.[16] It is counterintuitive that two alleged highly uncompetitive providers would attract about one-third of the country’s subscribers. We observed similar anomalies in other countries, including Finland, Switzerland, the United States, and the UK. These economic anomalies are prima facie evidence that Rewheel’s results are incorrect.
Rewheel’s Digital Fuel Monitor needs a warning label.
The warning label. Given the many theoretical and practical flaws and errors contained in the Rewheel study, we find it of no value when comparing prices internationally or establishing the level of competition in a country. A warning label informing readers about the lack of intellectual rigor and the misleading and incorrect nature of the Rewheel study’s results is appropriate and recommended.
[*] NERA Economic Consulting received financial support from TELUS Communications Corporation for the research and initial drafting of this paper. No other authors received compensation. All views expressed are those of the authors.
[1] See Rewheel/research, “4G&5G connectivity competitiveness 2020,” Digital Fuel Monitor, Rewheel research PRO study (Public Version), November 2020 (hereinafter Rewheel).
[2] Ibid, p. 1.
[3] Ibid.
[4] Ibid.
[5] See AT&T “Stream HBO Max with some AT&T unlimited plans,” https://www.att.com/support/article/wireless/KM1261921/.
[6] See AT&T Wireless Plans, https://www.att.com/plans/wireless/.
[7] Ibid.
[8] See Pew Research Center, “U.S. Smartphone Use in 2015, Chapter One: A Portrait of Smartphone Ownership,” p. 2.
[9] 30*0.68+65*0.32 = 41.20.
[10] For example, Rewheel collected “4G&5G mobile broadband plans with at least 100 gigabytes and 50Mbit/s peak speed” plans. (Rewheel, p. 3, (emphasis added).)
[11] See Koodo Prepaid Plans, https://www.koodomobile.com/prepaid-plans?INTCMP=KMNew_NavMenu_Shop_PrepaidPlans. Rewheel 2H 2020 State of Broadband Pricing, October 2020, p. 18.
[12] See 3 Prepay Plans, https://www.three.ie/buy/prepay.html#prepay-phone-plans; see also Rewheel 2H 2020 State of Broadband Pricing, October 2020, p. 18.
[13] Rewheel, p. 1.
[14] See Richard Marsden, Dr. Bruno Soria, and Hans-Martin Ihle, “Effective Spectrum Pricing: Supporting better quality and more affordable mobile services,” GSMA, February 2017, Figure 13.
[15] Rewheel, p. 11.
[16] Shares are for third quarter 2019 just prior to Rewheel’s data collection. (See TeleGeography, Country Profile, Romania, as of November 9, 2020, p. 32).
Scholarship Legal decision-making and enforcement under uncertainty are always difficult and always potentially costly. The risk of error is always present given the limits of knowledge, but it is magnified by the precedential nature of judicial decisions.
Legal decision-making and enforcement under uncertainty are always difficult and always potentially costly. The risk of error is always present given the limits of knowledge, but it is magnified by the precedential nature of judicial decisions: an erroneous outcome affects not only the parties to a particular case, but also all subsequent economic actors operating in “the shadow of the law.” The inherent uncertainty in judicial decision-making is further exacerbated in the antitrust context where liability turns on the difficult-to-discern economic effects of challenged conduct. And this difficulty is still further magnified when antitrust decisions are made in innovative, fast- moving, poorly-understood, or novel market settings—attributes that aptly describe today’s digital economy.
Written Testimonies & Filings "It is profoundly more important that Congress do its job to get assistance to the businesses, workers and communities who need that help right now that it is to pretend to have the answers in 2020 to a crisis of unknown and unknowable dimensions that may befall us in 2025 or 2050 or 2100."
Chairman Clay, Ranking Member Stivers and members of the subcommittee,
My name is R.J. Lehmann, and I am editor-in-chief and senior fellow with the International Center for Law & Economics. ICLE is a nonprofit, nonpartisan research center that works with a roster of more than 50 academic affiliates and research centers from around the globe to develop and disseminate academic output and build the intellectual foundation for rigorous, economically grounded public policy.
I am a recent addition to the ICLE staff. My own background is that I have spent the past 17 years as a journalist and public-policy analyst specializing in the business of insurance. That includes running the insurance policy program at the R Street Institute, which I co-founded in 2012.
The COVID-19 outbreak has triggered unprecedented interruption in the operations of businesses across the country and around the world. While roughly 37 percent of U.S. businesses maintain insurance policies to cover the loss of business income due to direct physical damage to a business property, such policies are not designed to insure revenue loss resulting from a pandemic, even where closure is required by a civil authority order. Indeed, many policies contain explicit endorsements clarifying that viruses and bacteria are excluded as causes for business interruption and loss-of-use coverages.
Earlier this year, Congress sought to address the disruption caused by COVID-19 through the Paycheck Protection Program and there have been various efforts to extend further relief to affected employers and employees. But it is understandable that many seek a more permanent solution and look to insurance markets as offering the framework to provide it.
I agree entirely with the analysis that the pandemic has highlighted a massive protection gap in commercial insurance products. I also agree that it is a problem that almost certainly calls for a governmental solution. I would, however, raise the threshold question of whether insurance is actually the best means to accomplish the public policy goals in question.
Insurance is a system of risk transfer, not a system of economic relief. Even if private insurers could provide this coverage—on their own or with government support—it is not clear their incentives would align with public health goals or with the aims members of Congress likely have in mind.
I would urge the subcommittee and Congress generally to proceed deliberatively before erecting structures that may not prove to be well-suited to the crisis we are currently experiencing, much less unforeseen future crises whose nature and scope we cannot know. In sum, do not legislate for the next pandemic when we are still in the midst of dealing with the current one.
In the business of insurance, there are certain general characteristics that determine whether it is possible, in theory, to insure a given risk. These include having a large number of similarly exposed individuals and having losses that are reasonably predictable. A textbook example of an uninsurable risk would be intentional acts, such as arson. You could not transfer to an insurer the risk that you will burn down your own home, because that risk is fully within your control.
Business interruption caused by a pandemic is not uninsurable in the same sense that intentional arson is uninsurable. There were insurance products available to cover loss of business income due to viral contagion before COVID-19 hit our shores, although clients’ interest in those products was reportedly fairly limited. There are still products that offer such coverage now, although the price of coverage has gone up significantly. On the micro level, for any given insurer and any given insured, viral business interruption is an insurable risk.
The problem is at the macro level. There is only a limited amount of capital that insurers would be willing to devote to a risk like pandemics. Some insurers will write some coverage. They might, for instance, cover a restaurant’s risk of food spoilage resulting from an extended shutdown. But they will not and should not gamble their entire balance sheets. And the capacity that the global insurance and reinsurance industry would ever be willing to devote to this risk cannot possibly match its unique scale.
In this macro sense, for a risk to be insurable, it must be possible to manage it through careful underwriting and diversification. Global pandemics make that impossible. They hit every business sector and every geographical region simultaneously. They even degrade the invested assets insurers use to back up their promises. In a scenario where half the global economy shuts down overnight, there is no world in which the insurance industry can single-handedly carry the other half on its back.
The only entity with the financial resilience, the balance sheet and the risk tolerance to offer such assistance is the federal government itself.
When I have appeared before this committee in the past, it has been to warn about the dangers of moral hazard that frequently accompany government intervention in insurance markets. The 50-year-old National Flood Insurance Program is a prime example of this danger. By providing insurance coverage to all comers at rates insufficient to match the level of risk, the NFIP encourages development in disaster-prone and environmentally sensitive regions.
While I remain disposed to skepticism about government insurance programs, I do not believe any of the proposals discussed here today—such as Rep. Maloney’s Pandemic Risk Insurance Act (PRIA) or the joint-trades’ Business Continuity Protection Plan (BCPP)—pose much, if any, risk of moral hazard. With or without insurance and with or without government support, there is likely nothing at all a business owner could do to avoid the impact of a pandemic. Indeed, the greater threat is a business that would go out of its way to keep its doors open, despite the dangers that could result.
Which is not to say moral hazard is irrelevant to the pandemic or to how insurance responds to it. Business interruption is far from the only insurance coverage implicated by viral contagion. Most obviously, employers in nearly every state must provide, on a no-fault basis, workers’ compensation coverage for illnesses contracted on the worksite or in the usual course of job duties. Businesses also obtain various commercial liability coverages that could be triggered if they breach a duty of care or otherwise recklessly cause foreseeable harm by exposing a customer or other third party to the virus.
Where a business is a potential nexus of contagion, we should want them to internalize that cost and to adjust their operations in the interest of better protecting public health. That could mean investments in mitigation, adaptation and prevention. It could mean making sure a worksite is well-stocked with personal protective equipment or that the spatial orientation is changed to reduce the risk of infection.
These casualty and liability lines of business exemplify how risk-based insurance rates can serve a regulatory function, providing price signals that encourage businesses to adopt those practices that best protect their employees and others. If Congress is to move forward with creating a federal insurance or reinsurance program to manage pandemic risk, I would strongly urge to focus tightly on the unique challenges of business interruption and not extend it to casualty and liability lines of coverage. It would be extremely unwise to extend public subsidies that could serve to encourage recklessness.
The approach proposed by PRIA is to graft coverage for pandemic risks onto the existing structure of business interruption coverage by providing a $750 billion federal backstop for insurers who choose to participate, with the industry retaining only about 5 percent of the total risk. But only a minority of businesses—a little over a third—currently maintain business interruption coverage. Given that the program would be voluntary for insurers to offer and voluntary for insureds to purchase, it is reasonable to assume less than a third would ultimately elect to carry it.
Even for those who do, there are real questions about whether the sorts of claims we can reasonably anticipate policyholders to make would actually be paid. PRIA is a good faith attempt to extend coverage and avoid the sorts of claims disputes that have prompted hundreds of businesses to sue their insurance companies. The program may well extend coverage but there are some predictable areas of conflict that will almost certainly land policyholders back in court.
Business interruption and contingent business coverages are components of commercial property insurance policies. PRIA would ask participating insurers to vitiate standard contract language that excludes claims for viral pandemics. But that would not change a more fundamental presumption of any property insurance policy: that there must be demonstrable physical damage to the insured property.
To be sure, there are legal theories—some of them currently being tested in the courts—that business closures are necessitated by viral contamination of surfaces within the covered property. But whether that is applicable in any given case is going to depend both on the nature of the virus and the nature of the property. If contamination can be easily cured by wiping down surfaces, that is going to be an extremely limited claim. The reality is, creative legal theories aside, most business closures in this pandemic have had nothing to do with potentially contaminated surfaces. They have instead sought to avoid transmission between people. That is not a risk covered by property insurance.
There is also the question of what triggers coverage. Both PRIA and the BCPP proposal tie coverage to public health emergency orders, such as mandated shutdowns. But the experience we have had in this pandemic shows why that is almost certainly insufficient. The initial wave of business closures did not come as a result of mandated shutdowns; they were in response to customers choosing to stay home. A number of states and localities never formally “shut down” businesses at all and yet still suffered precipitous drops in economic activity. As of October, after nearly all states lifted shutdown orders, airport traffic remained down 60 percent from before the pandemic and OpenTable restaurant reservations were down nearly 40 percent.
There is no “business is bad” insurance. Without some sort of external trigger, there is no cause to make a business interruption claim for a business that has merely been depressed, not interrupted.
Again, insurance is risk transfer, not economic assistance. It should give lawmakers pause that PRIA would represent a $750 billion investment of taxpayer dollars in a program that two-thirds or more of businesses will not access, where many claims will still be denied and where the kind of loss that will be most commonly experienced by businesses does not and cannot constitute a claim.
A central argument for a public-private partnership to support business interruption insurance for pandemics is that, while the federal government can bring its balance sheet to bear, it does not have the insurance industry’s expertise in modeling, managing and mitigating risk. I find myself in the uncomfortable position of critiquing that argument, given that it is one that I myself have made for the entirety of my career in public policy, whether the subject was flood insurance or crop insurance or terrorism insurance.
But it is important to ask: modeling, managing and mitigating the risk of what, specifically? In the case of business interruption insurance, it is not the risk of viral transmission. It is not even the risk of a pandemic, not quite. It is the risk of business closure as a result of a pandemic.
I mentioned earlier that I do not believe there is anything a business owner could do to avoid the impact of a pandemic. What they could do—what risk-based insurance might encourage them to do—is to avoid making a claim by refusing to shut their doors and by pressuring local leaders not to issue mandatory shutdown orders. From a public health perspective, that is the opposite of what we want to happen. And yet, we see it has happened. It is one reason we see the incoherent outcome that, in some cities, schools are closed while bars and restaurants are allowed to remain open.
Like any efficient insurance market, a risk-based insurance market for pandemic business interruption insurance would seek to align the incentives of the insured and the insurer. Among the ways this is generally accomplished is through deductibles, which discourage policyholders from making claims for shallow losses. More broadly, it is accomplished by matching premiums to the level of risk. For example, businesses that could continue operating remotely even in the midst of a pandemic are low-risk and would be offered the most affordable coverage.
On the other hand, risk-based insurance premiums for restaurants, gyms, theatres, barbers, manicurists—any environment where you have close personal contact with strangers or indoor mass congregations of people—would be punishingly expensive. Actuarial science is notoriously complex, but the basics of risk-based premiums are fairly simple: frequency times severity. The severity of a pandemic contagion, even if it happened just once a century, is so extreme that a risk-based premium could not be affordable for the overwhelming majority of small businesses—or even churches and social groups—that rely on in-person human interaction. If they were forced to buy this coverage, many could simply no longer exist. That is not a socially desirable outcome.
The saving grace—the reason we would not likely see that outcome—is itself discouraging. Because the coverage would be voluntary, these sorts of businesses almost certainly would not take it up. Thus, the very businesses who have been hardest hit by this pandemic and would likely be hardest hit in any future one would remain the most exposed.
Proposals like PRIA and the BCPP initially were put forward in the early days of the pandemic. The folly of imagining that lawmakers could have the foresight to craft structures that anticipate future pandemics is just how much has changed in the few months since those proposals were debuted.
I consulted with the insurance trades on the earliest drafts of what became the BCPP. I believe it was my idea to cap the maximum coverage the program would offer at three months of business income. Back in April, that seemed like a generous benefit. Seven months later, with caseloads breaking new records every day and a vaccine at least months away from broad distribution, it seems much less so.
PRIA was originally a $500 billion proposal. It is now a $750 billion proposal. But it is also clear that that amount, while a lot of money for a federal program, is not nearly enough for the scope of the problem. Moreover, PRIA is structured as a single pot of money. Were it in place during COVID-19, it may well have been completely depleted by the earliest phases of the pandemic, when the virus was contained largely to New York and New Jersey. By the time the second wave spread across the Sunbelt in June and July, there may have been nothing left, to say nothing of the third wave we are now encountering.
Any program that Congress does establish should follow some broad principles gleaned from our experience thus far with COVID-19. But we also should be humble about how much we still do not know even about the current pandemic, much less the next one.
The program should endeavor for broad participation, with a bias toward encouraging small businesses, nonprofits and community organizations to take part. Larger enterprises already have available to them a number of insurance options that small businesses do not, from the ability to create captive insurance companies to relatively easy access to bespoke products in the excess and surplus lines market. Indeed, our experience with the Terrorism Risk Insurance Act suggests we should be particularly skeptical of how large companies might use captives to game a structure like PRIA, including for tax-avoidance purposes, with the overwhelming majority of risk passed on to taxpayers.
If there is to be a premium or a participation fee for the program, it should be flat, not risk-based. One common concern of insurance markets is the problem of adverse selection. Because an insured has more information about their own risk than an insurer does, the riskiest businesses are also the most likely to buy coverage. While that is a problem for writing insurance profitably, the public health goals of pandemic response turn that issue on its head. The businesses most at risk of shutting down are the ones to whom we most need to extend a safety net. We want them to cooperate with shutdowns, not push back.
In the spirit of broad participation, the insurance industry should not be the sole marketing force for any federal pandemic risk program. PPP was administered primarily by banks and credit unions and that appears, on balance, to have worked pretty well. There is no reason that lending institutions, payroll processing companies or credit card issuers could not help to sign up participants.
The same applies when it comes to distributing benefits. The insurance industry’s claims-adjustment force is already pushed to capacity to keep up with disasters like hurricanes and wildfires. Adjusting business interruption claims requires special training. Moreover, adjusting claims is a slow and laborious process, which conflicts with the goal of getting money out the door as quickly as possible. A parametric trigger, such as the one in the BCPP, would better accomplish that goal.
The BCPP balances the parametric structure by enumerating specific purposes for which benefits can be used, like rent and payroll. Any disbursed benefits not used for those purposes could later be clawed back. While this is how PPP worked and how the BCPP would work, it is not how business interruption insurance works. A policyholder that makes a claim for business interruption might use the money to continue paying staff, but there would be nothing requiring them to do so. Even with PRIA in place, a business owner could make a claim for interruption while simultaneously placing all his or her employees on furlough. Lawmakers should understand that.
Another question is whether it is wise to create a federal program at all. Given that public health orders are overwhelmingly the jurisdiction of state and local governments, one option would be to allow the states to create their own programs, with the U.S. Treasury partially reimbursing the cost. This would require Congress to establish some minimum guidelines for qualifying programs. But so long as the reimbursement formula was relatively transparent and applied equitably, it would permit innovation and local customization in program design, while also limiting the “run on the bank” danger that a single pot of federal money like PRIA might face.
But above all, my recommendation to lawmakers is to take your time. Perhaps more private solutions, from the insurance industry or some other source, will emerge to meet these challenges before the next pandemic. Perhaps Congress would again have to provide ad hoc assistance. It is profoundly more important that Congress do its job to get assistance to the businesses, workers and communities who need that help right now that it is to pretend to have the answers in 2020 to a crisis of unknown and unknowable dimensions that may befall us in 2025 or 2050 or 2100.
Thank you, and I would be happy to answer any questions.
Scholarship In this chapter, we discuss the development of the duty to deal doctrine in antitrust law, its application to the digital economy, and proposals for specific duties to deal, such as data portability and interoperability.
In this chapter, we discuss the development of the duty to deal doctrine in antitrust law, its application to the digital economy, and proposals for specific duties to deal, such as data portability and interoperability.
Part I outlines the development of the duty to deal doctrine in antitrust law. The development of the doctrine in the United States will be compared to that in the European Union. Popular economic justifications for the doctrine and key cases will be explored. Part II then situates this doctrine within the digital economy, focusing on the importance of getting the contours of the doctrine right in that economy. As we shall see, the law and economics of the duty to deal caution against its application to dynamic, digital markets. This will be illustrated by looking at cases where it has been applied. Part III focuses on two specific categories of duties to deal: data portability and interoperability.
Scholarship This chapter takes the 2001 D.C. Circuit opinion in Microsoft as an inflection point in digital antitrust enforcement. With that case we can first clearly see all of the various threads pulled together that run through modern antitrust enforcement in high tech cases.
Antitrust enforcement in digital and high-tech markets is not disconnected from traditional antitrust theory or practice. Yet, unique features of firms operating in digital and other high-tech markets can necessitate modification of doctrine. For example, modern antitrust enforcement in digital markets needs to take seriously the presence of network effects in two-sided markets and the procompetitive justifications for various kinds of product design decisions that may otherwise appear to harm competitors under older models of antitrust enforcement. The goal, however, remains enforcement of the consumer welfare standard, even if enforcers and courts must be sensitive to features particular to digital markets.
This chapter takes the 2001 D.C. Circuit opinion in Microsoft as an inflection point in digital antitrust enforcement. With that case we can first clearly see all of the various threads pulled together that run through modern antitrust enforcement in high tech cases. This chapter begins with a brief overview of the precursor cases that informed enforcement up until the late 1990s before devoting attention to Microsoft and the subsequent cases that shape modern antitrust enforcement in digital markets.
TOTM President Donald Trump has repeatedly called for repeal of Section 230. But while Trump and fellow conservatives decry Big Tech companies for their alleged anti-conservative bias, . . .
President Donald Trump has repeatedly called for repeal of Section 230. But while Trump and fellow conservatives decry Big Tech companies for their alleged anti-conservative bias, including at yet more recent hearings, their issue is not actually with Section 230. It’s with the First Amendment.
Read the full piece here.
TL;DR U.S. Rep. Ken Buck (R-Colo.) has proposed what he calls a “Third Way” to improve competition in digital markets.
U.S. Rep. Ken Buck (R-Colo.) has proposed what he calls a “Third Way” to improve competition in digital markets. While Buck rejects many of the remedies proposed by the House Judiciary Committee’s Democrats, he generally accepts their premises about the state of the market. Ultimately, Buck’s “Third Way” is intended to highlight areas where he and the Democrats agree, while avoiding some of the specific regulations the Democrats have proposed.
Buck’s proposals would lead to a similar outcome to what the Democrats are proposing, even if he wants to avoid that. His most significant proposals—to apply the essential facilities doctrine to digital platforms, require them to be interoperable with other services, to ban self-preferencing by those platforms, and to ban below-cost selling—would constrain significantly the abilities of existing platforms to serve their customers and of would-be entrants to compete with incumbents. They also would most likely necessitate significant regulation, including price controls.
Read the full explainer here.
Presentations & Interviews ICLE President Geoffrey Manne took part in an Oct. 30, 2020, panel discussion hosted by the Federalist Society’s Corporations, Securities & Antitrust Practice Group and . . .
ICLE President Geoffrey Manne took part in an Oct. 30, 2020, panel discussion hosted by the Federalist Society’s Corporations, Securities & Antitrust Practice Group and the Regulatory Transparency Project on the U.S. Department of Justice’s antitrust lawsuit against Google. Watch the video below.
Presentations & Interviews ICLE Executive Director Ian Adams took part in a panel discussion on the future of federal tech policy as part of the Lincoln Network’s Reboot . . .
ICLE Executive Director Ian Adams took part in a panel discussion on the future of federal tech policy as part of the Lincoln Network’s Reboot 2020 conference. Watch video of the event below.
