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November 20, 2017

The following statement is attributable to Geoffrey A. Manne, Executive Director, ICLE:

PORTLAND, OR — Today the US Department of Justice filed suit to stop the proposed AT&T/Time Warner merger.

Under current antitrust law the DOJ’s challenge is likely to fail; the courts haven’t rejected a so-called “vertical merger” for decades. But the weakness of the DOJ’s case is also a matter of well-established economics.

According to the DOJ’s complaint:

“AT&T/DirecTV would hinder its rivals by forcing them to pay hundreds of millions of dollars more per year for Time Warner’s networks, and it would use its increased power to slow the industry’s transition to new and exciting video distribution models that provide greater choice for consumers. The proposed merger would result in fewer innovative offerings and higher bills for American families.”

None of these claims holds water.

The bulk of Time Warner’s revenue comes from distributing its programming via every feasible means. Withholding content from competitors simply makes no financial sense — especially when AT&T is shelling out some $85 billion for the privilege.

A price hike isn’t in the cards, either. Under US antitrust law, any conceivable harm must be “merger-specific.” But there is nothing about AT&T owning HBO, CNN, or any other Time Warner content that suddenly makes that content more valuable. If a price increase did make sense, Time Warner would already have done it.

And even if AT&T were to withhold certain content from competitors, exclusive or preferential arrangements between input providers and distributors are virtually always beneficial for consumers. As one group of former FTC economists (including, oddly enough, the DOJ’s current chief economist) put it: “there is a paucity of support for the proposition that vertical restraints/vertical integration are likely to harm consumers.”

In the case of film and tv content, such arrangements lead to more content creation and more innovative means of distributing it. And as users are ever-more rapidly cord-cutting and unbundling their viewing, multiple distribution models — each with increasingly different collections of content — ably compete for viewers’ attention.

Of course, certain competitors are bound to complain — but US antitrust laws don’t protect competitors at the expense of consumers.

Finally, the government already has a mechanism for policing the distribution of content by cable networks. Under Section 628 of the Communications Act, the FCC prohibits cable companies from “unfairly” refusing to make their own content available to competitors.

Post merger, if AT&T were to offer HBO or other Time Warner content exclusively on DirecTV, competing cable operators could challenge that conduct under the FCC rules. And if the exclusion were found to have the “purpose or effect” of “significantly hindering or preventing” a rival from providing competitive service, the exclusive deal would be prohibited.

It is disingenuous for the DOJ to act as if there is no viable way for the government to ensure that Time Warner content is widely available to consumers absent merger enforcement. And there is certainly no valid economic rationale to prohibit or condition the merger.

Canada’s large merchants have called on the government to impose price controls on interchange fees, claiming this would benefit not only merchants but also consumers. But experience elsewhere contradicts this claim.

In a recently released Macdonald Laurier Institute report, Julian Morris, Geoffrey A. Manne, Ian Lee, and Todd J. Zywicki detail how price controls on credit card interchange fees would result in reduced reward earnings and higher annual fees on credit cards, with adverse effects on consumers, many merchants and the economy as a whole.

This study draws on the experience with fee caps imposed in other jurisdictions, highlighting in particular the effects in Australia, where interchange fees were capped in 2003. There, the caps resulted in a significant decrease in the rewards earned per dollar spent and an increase in annual card fees. If similar restrictions were imposed in Canada, resulting in a 40 percent reduction in interchange fees, the authors of the report anticipate that:

1. On average, each adult Canadian would be worse off to the tune of between $89 and $250 per year due to a loss of rewards and increase in annual card fees:
   1. For an individual or household earning $40,000, the net loss would be $66 to $187; and
   2. for an individual or household earning $90,000, the net loss would be $199 to $562.
2. Spending at merchants in aggregate would decline by between $1.6 billion and $4.7 billion, resulting in a net loss to merchants of between $1.6 billion and $2.8 billion.
3. GDP would fall by between 0.12 percent and 0.19 percent per year.
4. Federal government revenue would fall by between 0.14 percent and 0.40 percent.

Moreover, tighter fee caps would “have a more dramatic negative effect on middle class households and the economy as a whole.”

You can read the full report here.

This week, the International Center for Law & Economics (ICLE) filed an ex parte notice in the FCC’s Restoring Internet Freedom docket. In it, we reviewed two of the major items that were contained in our formal comments. First, we noted that

the process by which [the Commission] enacted the 2015 [Open Internet Order]… demonstrated scant attention to empirical evidence, and even less attention to a large body of empirical and theoretical work by academics. The 2015 OIO, in short, was not supported by reasoned analysis.

Further, on the issue of preemption, we stressed that

[F]ollowing the adoption of an Order in this proceeding, a number of states may enact their own laws or regulations aimed at regulating broadband service… The resulting threat of a patchwork of conflicting state regulations, many of which would be unlikely to further the public interest, is a serious one…

[T]he Commission should explicitly state that… broadband services may not be subject to certain forms of state regulations, including conduct regulations that prescribe how ISPs can use their networks. This position would also be consistent with the FCC’s treatment of interstate information services in the past.

Our full ex parte comments can be viewed here.

The FTC will hold an “Informational Injury Workshop” in December “to examine consumer injury in the context of privacy and data security.” Defining the scope of cognizable harm that may result from the unauthorized use or third-party hacking of consumer information is, to be sure, a crucial inquiry, particularly as ever-more information is stored digitally. But the Commission — rightly — is aiming at more than mere definition. As it notes, the ultimate objective of the workshop is to address questions like:

How do businesses evaluate the benefits, costs, and risks of collecting and using information in light of potential injuries? How do they make tradeoffs? How do they assess the risks of different kinds of data breach? What market and legal incentives do they face, and how do these incentives affect their decisions?

How do consumers perceive and evaluate the benefits, costs, and risks of sharing information in light of potential injuries? What obstacles do they face in conducting such an evaluation? How do they evaluate tradeoffs?

Understanding how businesses and consumers assess the risk and cost “when information about [consumers] is misused,” and how they conform their conduct to that risk, entails understanding not only the scope of the potential harm, but also the extent to which conduct affects the risk of harm. This, in turn, requires an understanding of the FTC’s approach to evaluating liability under Section 5 of the FTC Act.  

The problem, as we discuss in comments submitted by the International Center for Law & Economics to the FTC for the workshop, is that the Commission’s current approach troublingly mixes the required separate analyses of risk and harm, with little elucidation of either.

The core of the problem arises from the Commission’s reliance on what it calls a “reasonableness” standard for its evaluation of data security. By its nature, a standard that assigns liability for only unreasonable conduct should incorporate concepts resembling those of a common law negligence analysis — e.g., establishing a standard of due care, determining causation, evaluating the costs of and benefits of conduct that would mitigate the risk of harm, etc. Unfortunately, the Commission’s approach to reasonableness diverges from the rigor of a negligence analysis. In fact, as it has developed, it operates more like a strict liability regime in which largely inscrutable prosecutorial discretion determines which conduct, which firms, and which outcomes will give rise to liability.

Most troublingly, coupled with the Commission’s untenably lax (read: virtually nonexistent) evidentiary standards, the extremely liberal notion of causation embodied in its “reasonableness” approach means that the the mere storage of personal information, even absent any data breach, could amount to an unfair practice under the Act — clearly not a “reasonable” result.

The notion that a breach itself can constitute injury will, we hope, be taken up during the workshop. But even if injury is limited to a particular type of breach — say, one in which sensitive, personal information is exposed to a wide swath of people — unless the Commission’s definition of what it means for conduct to be “likely to cause” harm is fixed, it will virtually always be the case that storage of personal information could conceivably lead to the kind of breach that constitutes injury. In other words, better defining the scope of injury does little to cabin the agency’s discretion when conduct creating any risk of that injury is actionable.   

Our comments elaborate on these issues, as well as providing our thoughts on how the subjective nature of informational injuries can fit into Section 5, with a particular focus on the problem of assessing informational injury given evolving social context, and the need for appropriately assessing benefits in any cost-benefit analysis of conduct leading to informational injury.

ICLE’s full comments are available here.

The comments draw upon the article, When ‘Reasonable’ Isn’t: The FTC’s Standard-Less Data Security Standard, by Geoffrey A. Manne and Kristian Stout, forthcoming in the Journal of Law, Economics and Policy.

The International Center for Law & Economics (ICLE) filed two sets of comments with the Federal Communications Commission supporting the reversal of former Chairman Wheeler’s controversial 2015 Open Internet Order (OIO). One set of comments addresses the economic and policy problems with the Order, the other focuses particularly on privacy issues.

“The 2015 Order, with its reclassification of broadband providers under Title II, is a towering manifestation of the delusion of technocrats everywhere: that government can surely “design” a better future if only it pulls the right levers.”

Geoffrey A. Manne, ICLE Executive Director

Federal administrative agencies are required to engage in “reasoned decision-making” based on a thorough review and accurate characterization of the record. Their analysis must be based on facts and reasoned predictions; it must be rooted in sound economic reasoning; it must be logically coherent; it must not entail subterfuge or misleading statements. But on even these most basic grounds the 2015 OIO falls short.

Only through gross oversimplification and neglect of economics could the Commission assert the confidence in its position sufficient to saddle the Internet with such an invasive regulatory regime. The economic literature ignored by the Commission calls into question fundamental assertions in the Order, including the existence of a “virtuous cycle” of broadband deployment, the effect of reclassification on ISPs’ investment incentives, and the ability of ISPs without market power to act as “gatekeepers.”

In particular, the Commission offered no economic support for its outright ban on paid prioritization. Scarcity on the Internet (as everywhere else) is a fact of life, and if rationing isn’t performed by a price mechanism, it will be performed by something else.

Prioritization facilitates the optimal use of scarce data, enables network management practices that alleviate congestion overall, and allows ISPs to reduce the risk of infrastructure investment by speeding up the rate at which they realize returns. Deterring or prohibiting innovative broadband business models that seek to offer content via programs like zero rating and sponsored data undermines not only optimal policy making, but also net neutrality proponents’ own stated aim to enhance “the value of [] broadband to consumers.”

As we have noted previously, the Communications Act does not actually authorize the FCC to adopt net neutrality rules; such are the realities of interpreting and enforcing laws written to govern telegraphs in 1934 (and amended in 1996, but not to address the Internet) to govern 21st century communications networks. Of course, there’s a simple solution to that problem: Congress can amend the Act or pass a new law if it decides it wants the FCC to have the authority to implement net neutrality rules.

The full text of ICLE’s economic and policy comments can be found here. ICLE’s privacy comments can be found here.
Selected ICLE work on this issue:

• The Feds Lost on Net Neutrality, But Won Control of the Internet, Wired
• Net Neutrality’s Hollow Promise to Startups, Computerworld
• Since When Is Free Web Access a Bad Thing?, The Wall Street Journal
• How to Break the Internet, Reason Magazine
• Netflix’s Predictable Net Neutrality Conversion, The Hill
• Understanding Net(flix) Neutrality, Forbes
• ICLE & TechFreedom Policy Comments on Net Neutrality, FCC
• TechFreedom & ICLE Legal Comments on Net Neutrality, FCC
• ICLE Comments, Protecting the Privacy of Customers of Broadband, FCC
• Amicus Brief in USTelecom v. FCC, DC Circuit
• Thirty-two Scholars of Law and Economics Urge the FTC to Advise the FCC to Employ Case-by-Case Rules in Regulating Net Neutrality, FTC

Geoffrey Manne was quoted in the Washington Post on the idea that Yelp might push for antitrust actions against Google in the US, similar to what led to a record $2.7 billion fine in the EU.

Key federal officials, such as Acting FTC Chairwoman Maureen Ohlhausen, were part of a group that chose to end an agency investigation into Google five years ago. And Makan Delrahim, Trump’s Justice Department nominee for antitrust issues, is viewed by analysts as an independent professional who is unlikely to bow to outside pressure.

Still, some of the same companies that pushed for European antitrust action could launch a similar campaign in the United States. “We are going to leave all options on the table,” said Luther Lowe, vice president of public policy at Yelp, which played a major role in lobbying against Google at the European Commission.

Should Yelp push for U.S. regulators to act, there is no guarantee that they will. Even if they do, the resulting investigation may not necessarily lead to an enforcement action, and any enforcement action would need to pass muster with a judge, said Geoffrey Manne, executive director of the International Center for Law and Economics, which is partly funded by Google. “Unless you can convince a court, you’re stuck,” said Manne.

Click here to read the Washington Post article. 

Last week the International Center for Law & Economics filed comments on the FCC’s Broadband Privacy NPRM. ICLE was joined in its comments by the following scholars of law & economics:

• Babette E. Boliek, Associate Professor of Law, Pepperdine School of Law
• Adam Candeub, Professor of Law, Michigan State University College of Law
• Justin (Gus) Hurwitz, Assistant Professor of Law, Nebraska College of Law
• Daniel Lyons, Associate Professor, Boston College Law School
• Geoffrey A. Manne, Executive Director, International Center for Law & Economics
• Paul H. Rubin, Samuel Candler Dobbs Professor of Economics, Emory University Department of Economics

As we note in our comments:

The Commission’s NPRM would shoehorn the business models of a subset of new economy firms into a regime modeled on thirty-year-old CPNI rules designed to address fundamentally different concerns about a fundamentally different market. The Commission’s hurried and poorly supported NPRM demonstrates little understanding of the data markets it proposes to regulate and the position of ISPs within that market. And, what’s more, the resulting proposed rules diverge from analogous rules the Commission purports to emulate. Without mounting a convincing case for treating ISPs differently than the other data firms with which they do or could compete, the rules contemplate disparate regulatory treatment that would likely harm competition and innovation without evident corresponding benefit to consumers.

In particular, we focus on the FCC’s failure to justify treating ISPs differently than other competitors, and its failure to justify more stringent treatment for ISPs in general:

In short, the Commission has not made a convincing case that discrimination between ISPs and edge providers makes sense for the industry or for consumer welfare. The overwhelming body of evidence upon which other regulators have relied in addressing privacy concerns urges against a hard opt-in approach. That same evidence and analysis supports a consistent regulatory approach for all competitors, and nowhere advocates for a differential approach for ISPs when they are participating in the broader informatics and advertising markets.

With respect to the proposed opt-in regime, the NPRM ignores the weight of economic evidence on opt-in rules and fails to justify the specific rules it prescribes. Of most significance is the imposition of this opt-in requirement for the sharing of non-sensitive data.

On net opt-in regimes may tend to favor the status quo, and to maintain or grow the position of a few dominant firms. Opt-in imposes additional costs on consumers and hurts competition — and it may not offer any additional protections over opt-out. In the absence of any meaningful evidence or rigorous economic analysis to the contrary, the Commission should eschew imposing such a potentially harmful regime on broadband and data markets.

Finally, we explain that, although the NPRM purports to embrace a regulatory regime consistent with the current “federal privacy regime,” and particularly the FTC’s approach to privacy regulation, it actually does no such thing — a sentiment echoed by a host of current and former FTC staff and commissioners, including the Bureau of Consumer Protection staff, Commissioner Maureen Ohlhausen, former Chairman Jon Leibowitz, former Commissioner Josh Wright, and former BCP Director Howard Beales.

Our full comments are available here.

Today, Federal Communications Commission Chairman Ajit Pai announced the initiation of a rulemaking that could lay the groundwork for a reversal of his predecessor’s controversial 2015 Open Internet Order (OIO).

By questioning the unprecedented and ill-supported expansion of FCC authority that undergirds the Order, Chairman Pai has taken a crucial step toward re-imposing economic rigor and the rule of law at the FCC.

In seeking to review and correct former Chairman’s Wheeler’s questionable understanding of both the law and the economics of the OIO, Chairman Pai affirms his understanding that the dynamic Internet economy doesn’t lend itself to regulation by rules intended for static public utilities like water or electricity providers. ISPs operate in complex, unpredictable markets and face stiff (and increasing) competition. Regulation by inflexible, one-size-fits-all rules was never suitable.

The 2015 OIO was the FCC’s third serious attempt to enact net neutrality rules. Former Chairman Wheeler claimed authority for his endeavor by classifying ISPs as common carriers under Title II of the Communications Act, and he claimed separate authority to impose a sweeping “Internet conduct” rule to micromanage ISPs — ironically, in the supposed service of increasing infrastructure investment.

In fact, the imposition of common carrier rules upon ISPs is a virtual guarantee that investment will subside, innovation will stagnate, and the market will become permanently dominated by a few large companies. As Chairman Pai noted today: “Our nation’s smallest providers simply do not have the means or the margins to withstand the Title II regulatory onslaught.”

For many of us the fundamental problem with the OIO is quite simple: The Communications Act, as it currently stands, does not actually authorize the FCC to adopt net neutrality rules. You may think that’s appalling and surprising, but such are the realities of interpreting and enforcing laws written to govern telegraphs in 1934 (and amended in 1996, but not to address the Internet) to govern 21st-century communications networks.

Of course, there’s a simple solution to that problem: Congress can amend the Act or pass a new law if it decides it wants the FCC to have the authority to implement net neutrality rules.

Chairman Pai’s efforts are an important first step on the road to that eventuality.

Selected ICLE work on this issue:

• The Feds Lost on Net Neutrality, But Won Control of the Internet, Wired, here
• Net Neutrality’s Hollow Promise to Startups, Computerworld, here
• Since When Is Free Web Access a Bad Thing?, The Wall Street Journal, here
• How to Break the Internet, Reason Magazine, here
• Netflix’s Predictable Net Neutrality Conversion, The Hill, here
• Understanding Net(flix) Neutrality, Forbes, Oregonian Baltimore Sun, here
• Net Neutrality is Bad for Consumers and Probably Illegal, Truth on the Market, here
• Court strikes down Net neutrality rules but grants FCC sweeping new power over the Internet, Truth on the Market, here
• ICLE & TechFreedom Policy Comments on Net Neutrality, here
• TechFreedom & ICLE Legal Comments on Net Neutrality, here
• ICLE & TechFreedom Comments on Communications Act Rewrite, here
• US Telecom v. FCC (DC Cir.), Amicus Brief of ICLE & Leading Law & Economics Scholars, here
• Thirty-two Scholars of Law and Economics Urge the FTC to Advise the FCC to Employ Case-by-Case Rules in Regulating Net Neutrality, letter to the FTC, here

Today, the International Center for Law & Economics (ICLE) released a study updating our 2014 analysis of the economic effects of the Durbin Amendment to the Dodd-Frank Act.

The new paper, Unreasonable and Disproportionate: How the Durbin Amendment Harms Poorer Americans and Small Businesses, by ICLE scholars, Todd J. Zywicki, Geoffrey A. Manne, and Julian Morris, can be found here; a Fact Sheet highlighting the paper’s key findings is available here.

Introduced as part of the Dodd-Frank Act in 2010, the Durbin Amendment sought to reduce the interchange fees assessed by large banks on debit card transactions. In the words of its primary sponsor, Sen. Richard Durbin, the Amendment aspired to help “every single Main Street business that accepts debit cards keep more of their money, which is a savings they can pass on to their consumers.”

Unfortunately, although the Durbin Amendment did generate benefits for big-box retailers, ICLE’s 2014 analysis found that it had actually harmed many other merchants and imposed substantial net costs on the majority of consumers, especially those from lower-income households.

In the current study, we analyze a welter of new evidence and arguments to assess whether time has ameliorated or exacerbated the Amendment’s effects. Our findings in this report expand upon and reinforce our findings from 2014:

Relative to the period before the Durbin Amendment, almost every segment of the interrelated retail, banking, and consumer finance markets has been made worse off as a result of the Amendment.

Predictably, the removal of billions of dollars in interchange fee revenue has led to the imposition of higher bank fees and reduced services for banking consumers.

In fact, millions of households, regardless of income level, have been adversely affected by the Durbin Amendment through higher overdraft fees, increased minimum balances, reduced access to free checking, higher ATM fees, and lost debit card rewards, among other things.

Nor is there any evidence that merchants have lowered prices for retail consumers; for many small-ticket items, in fact, prices have been driven up.

Contrary to Sen. Durbin’s promises, in other words, increased banking costs have not been offset by lower retail prices.

At the same time, although large merchants continue to reap a Durbin Amendment windfall, there remains no evidence that small merchants have realized any interchange cost savings — indeed, many have suffered cost increases.

And all of these effects fall hardest on the poor. Hundreds of thousands of low-income households have chosen (or been forced) to exit the banking system, with the result that they face higher costs, difficulty obtaining credit, and complications receiving and making payments — all without offset in the form of lower retail prices.

Finally, the 2017 study also details a new trend that was not apparent when we examined the data three years ago: Contrary to our findings then, the two-tier system of interchange fee regulation (which exempts issuing banks with under $10 billion in assets) no longer appears to be protecting smaller banks from the Durbin Amendment’s adverse effects.

This week the House begins consideration of the Amendment’s repeal as part of Rep. Hensarling’s CHOICE Act. Our study makes clear that the Durbin price-control experiment has proven a failure, and that repeal is, indeed, the only responsible option.

Click on the following links to read:

Full Paper

Fact Sheet

SummaryUnreasonable and Disproportionate: How the Durbin Amendment Harms Poorer Americans and Small Businesses