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Regulated firms and their Washington lawyers study agency reports and public statements carefully to figure out the rules of the road; the clearer the rules, the easier it is for regulated firms to understand how the rules affect their businesses and to plan accordingly. So long as the regulator and the regulated firm are on the same page, resources will be put to the most valuable use allowed under the regulations.

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Yesterday, AT&T announced it was halting its plan to acquire T-Mobile. Presumably AT&T did not think it could prevail in defending the merger in two places simultaneously—one before a federal district court judge (to defend against the DOJ’s case) and another before an administrative law judge (to defend against the FCC’s case). Staff at both agencies appeared intractable in their opposition. AT&T’s option of defending cases sequentially, first against the DOJ then against the FCC, was removed by the DOJ’s threat to withdraw its complaint unless AT&T re-submit its merger application to the FCC. The FCC rarely makes a major license-transfer decision without the green light from the DOJ on antitrust issues. Instead, the FCC typically piles on conditions to transfer value created by the merger to complaining parties after the DOJ has approved a merger. Prevailing first against the DOJ would have rendered the FCC’s opposition moot.

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Geoff Manne’s blog on the FCC’s Staff Analysis and Findings (“Staff Report”) has inspired me to come up with a top ten list. The Staff Report relies heavily on concentration indices to make inferences about a carrier’s pricing power, even though direct evidence of pricing power is available (and points in the opposite direction). In this post, I have chosen ten lines from the Staff Report that reveal the weakness of the economic analysis and suggest a potential regulatory agenda. It is clear that the staff want T-Mobile’s spectrum to land in the hands of a suitor other than AT&T—the government apparently can allocate scare resources better than the market—and that the report’s authors define the public interest as locking AT&T’s spectrum holdings in place.

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Yesterday, the editorial page of the New York Times opined that wireless consumers needed “more protection” than that afforded by voluntary agreements by the carriers and existing regulation. The essay pointed to the “troublesome pricing practices that have flourished” in the industry, including Verizon’s alleged billing errors, as the basis for stepped up enforcement. As evidence of a lack of wireless competition, the editorial cites several indicia, none of which is persuasive.

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Economists have long warned against price regulation in the context of network industries, but until now our tools have been limited to complex theoretical models. Last week, the heavens sent down a natural experiment so powerful that the theoretical models are blushing: In response to a new regulation preventing banks from charging debit-card swipe fees to merchants, Bank of America announced that it would charge its customers $5 a month for debit card purchases. And Chase and Wells Fargo are testing $3 monthly debit-card fees in certain markets. In case you haven’t been following the action, the basic details are here. What in the world does this development have to do with an “open” Internet? A lot, actually.

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Milton Mueller responded to my post Wednesday on the DOJ’s decision to halt the AT&T/T-Mobile merger by asserting that there was no evidence the merger would lead to “anything innovative and progressive” and claiming “[t]he spectrum argument fell apart months ago, as factual inquiries revealed that AT&T had more spectrum than Verizon and the mistakenly posted lawyer’s letter revealed that it would be much less expensive to expand its capacity than to acquire T-Mobile.”  With respect to Milton, I think he’s been suckered by the “big is bad” crowd at Public Knowledge and Free Press.  But he’s hardly alone and these claims — claims that may well have under-girded the DOJ’s decision to step in to some extent — merit thorough refutation.

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Abstract

The Federal Communications Commission’s Network Neutrality Order regulates how broadband networks explain their services to customers, mandates that subscribers be permitted to deploy whatever computers, mobile devices, or applications they like for use with the network access service they purchase, imposes a prohibition upon unreasonable discrimination in network management such that Internet Service Provider efforts to maintain service quality (e.g. mitigation congestion) or to price and package their services do not burden rival applications.

This paper offers legal and economic critique of the new Network Neutrality policy and particularly the no blocking and no discrimination rules. While we argue the FCC‘s rules are likely to be declared beyond the scope of the agency’s charter, we focus upon the economic impact of net neutrality regulations. It is beyond paradoxical that the FCC argues that it is imposing new regulations so as to preserve the Internet’s current economic structure; that structure has developed in an unregulated environment where firms are free to experiment with business models – and vertical integration – at will. We demonstrate that Network Neutrality goes far further than existing law, categorically prohibiting various forms of economic integration in a manner equivalent to antitrust’s per se rule, properly reserved for conduct that is so likely to cause competitive harm that the marginal benefit of a fact-intensive analysis cannot be justified. Economic analysis demonstrates that Network Neutrality cannot be justified upon consumer welfare grounds. Further, the Commission’s attempt to justify its new policy simply ignores compelling evidence that “open access” regulations have distorted broadband build-out in the United States, visibly reducing subscriber growth when imposed and visibly increasing subscriber growth when repealed. On the other, the FCC manages to cite just one study – not of the broadband market – to support its claims of widespread foreclosure threats. This empirical study, upon closer scrutiny than the Commission appears to have given it, actually shows no evidence of anti-competitive foreclosure. This fatal analytical flaw constitutes a smoking gun in the FCC’s economic analysis of net neutrality.

Abstract

Antitrust is back in vogue at the U.S. Supreme Court. Whereas the Rehnquist Court decided few antitrust cases in its latter years (only one from 1993 to 1995, one each year from 1996 through 1999, and none from 2000 to 2003), the Roberts Court issued seven antitrust decisions in its first two years alone. Numerous commentators have characterized the Roberts Court’s antitrust decisions as radical departures that betray a pro-business, anti-consumer bias. While some of the decisions do represent significant changes from past practice (see, e.g., Leegin, which overruled the 1911 Dr. Miles rule of per se illegality for minimum resale price maintenance, and Twombly, which abrogated the infamous “no set of facts” pleading standard set forth in the 1957 Conley v. Gibson decision), the “pro-business/anti-consumer” characterization of the Roberts Court’s antitrust decisions is inaccurate. The characterization – caricature, really – fails to appreciate the fundamental limits of antitrust, a body of law that requires judges and juries to make fine distinctions between procompetitive and anticompetitive behaviors that frequently resemble each other. While false acquittals of anticompetitive conduct may harm consumers, so may false convictions of procompetitive actions. And efforts to eliminate errors in liability judgments are themselves costly. Optimal antitrust rules will therefore aim to minimize the sum of decision costs (the costs of reaching a liability decision) and expected error costs (the social losses from false convictions and false acquittals). Each of the Roberts Court’s antitrust decisions can be defended in light of this “decision-theoretic” approach, an approach calculated to maximize the effectiveness of the antitrust enterprise, to the ultimate benefit of consumers. This Article first describes the fundamental limits of antitrust and the decision-theoretic approach such limits inspire. It then analyzes the Roberts Court’s antitrust decisions, explaining how each coheres with the decision-theoretic model. Finally, it predicts how the Court will address three issues likely to come before it in the future: tying, loyalty rebates, and bundled discounts.

Richard Thaler’s NYT Economic View column features Tom Hazlett (my colleague, and former chief economist as the FCC) proposal for auctioning off TV spectrum.   Thaler points out…

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