I blogged a bit about the MetroPCS net neutrality complaint a few weeks ago.  The complaint, you may recall, targeted the MetroPCS menu of packages and pricing offered to its consumers.  The idea that MetroPCS, about one-tenth the size of Verizon, has market power is nonsense.  As my colleague Tom Hazlett explains, restrictions on MetroPCS in the name of net neutrality are likely to harm consumers, not help them:

Indeed, low-cost prepaid plans of MetroPCS are popular with users who want to avoid long-term contracts and are price sensitive. Half its customers are ‘cord cutters’, subscribers whose only phone is wireless and usage is intense. Voice minutes per month average about 2,000, more than double that of larger carriers.  The $40 plan is cheap because it’s inexpensively delivered using 2G technology.   It is not broadband (topping out, in third party reviews, at just 100 kbps), and has software and capacity issues. In general, voice over internet is not supported by the handsets and video streaming is not available on the network. The carrier deals with those limitations in three ways.

First, the $40 per month price tag extends a fat discount. Unlimited everything can cost $120 on faster networks. Second, it has also deployed new 4G technology, offering both a $40 tier similar to the 2G product (no video streaming), but also a pumped up version with video streaming, VoIP and everything else – without data caps – for $60 a month. Of course, this network has far larger capacity and is much zippier (reliable at 700 kbps).  PC World rated the full-blown 4G service “dirt cheap”.
Third, to upgrade the cheaper-than-dirt 2G experience, MetroPCS got Google – owner of YouTube – to compress their videos for delivery over the older network. This allowed the mobile carrier to extend unlimited wildly popular YouTube content to its lowest tier subscribers.  Busted! Favouring YouTube is said to violate neutrality. …

So much for the “consumer welfare” case for net neutrality in practice.  Of course, the FCC mandate is one of “public interest,” and not just consumer welfare.  So — perhaps another case can be made to defend the MetroPCS complaint?   Malkia Cyril from the Center for Media Justice offers just such a case in a recent blog post.  The problem with MetroPCS satisfying consumer demand for low-cost prepaid plans? Cyril argues that the “Lowering the price for partial Internet service while calling it “unlimited access” is a fraudulent gimmick that Metro PCS hopes will confuse low-income consumers into buying its phones,” and that it is “un-American to give low-income communities substandard Internet service that creates barriers to economic opportunity and democratic engagement.”

Cyril is wrong that competition for low-price plans makes low-income consumers worse off.  The claim is the same one that is often made in defense of restricting the access to low-income individuals to other products (and especially consumer credit) because their purchasing decisions cannot be trusted, i.e. the revealed preferences of those 8 million consumers should be substituted for by the Federal Communications Commission in this case.  This is precisely the type of claim for which a little bit of economic analysis can go a long way in shedding some light.

David Honig, co-founder of the liberal Minority Media & Telecommunications Council, makes the relevant points (HT: Hazlett):

One of the wireless carriers is offering three packages, all of VOIP-enabled (so they can get services like Skype) with free access to any lawful website, and all of them clearly labeled:

• Plan A: $40, with no multimedia streaming (that is, no movie downloads such as Netflix, porn, etc.)

• Plan B: $50, with metered multimedia streaming.

• Plan C: $60, with unlimited multimedia streaming.

Could you decide which of these three packages meets your needs?

Or is all this just too confusing? Cyril thinks so.

She writes that Plan A “will confuse low-income consumers” into buying this carrier’s cell phones because they won’t be able to figure out that “if you want the WHOLE Internet, you just have to pay more.”

Well, actually you don’t have to pay more. The most expensive option — Plan C — costs $40 less than the least expensive offering of any of the other carriers. And if you later discover you don’t like Plan A, you can upgrade to Plan B or Plan C with no penalty, or you can pay the $100 it would cost to get service similar to Plan C from competing carriers. And you can do that immediately, since none of these plans has an early termination fee. What’s wrong with paying less for the particular services you want?

Cyril is making a common mistake among us lefties when it comes to low income people — she is being paternalistic. Those poor poor people. They can’t think for themselves, so the government has to make decisions for them. In this case, Cyril argues, the FCC should outlaw Plan A (and maybe Plan B) and require every carrier to offer only full-menu service like Plan C. All this in the name of “net neutrality.”

If I’ve learned anything from my 45 years working with low income folks, it’s this: they’re intelligent and they’re resourceful. They have to be in order to survive. They don’t appreciate condescension or sloganeering in their name. And they have sense enough to know whether they’d rather use an extra $20 a month for movie downloads or for movie tickets — and would rather get discounts for services they do not want or need. …

What the FCC doesn’t need to do is increase costs for those who can least afford it. As long as there’s full transparency, low income people ought to be able to choose Plan A, B or C. Low income people — the underserved — don’t need the FCC to decide, for them, how they can spend their money.

Well put.

This relates to an important economic point that the proponents of these types of regulation often miss, including in the context of lawyer licensing, but also with respect to the hundreds of state and local regulations impacting hundreds of industries that create barriers to entry in the provision of medical services, dental services, hairdressing, etc.  The introduction of lower quality products provides greater choice and significant economic value.   The fact that not all consumers demand (or can afford) premium brands and services does not mean that consumers are exploited.   Recall Milton Friedman’s statement that lawyer licensing is very much like requiring consumers desiring an automobile to purchase a Cadillac.  In this case, low-income consumers would bear the brunt of a restriction against the type of plan offered by MetroPCS.

There is a longstanding debate over the differences between the FCC’s “public interest” standard and the “consumer welfare” standard used in traditional antitrust analysis.  Sometimes, the two appear to conflict.  Sometimes, as is the case here, with the benefit of economics it is clear the two standards converge.  Here’s hoping the FCC doesn’t take the bait.

Filed under: antitrust, behavioral economics, economics, net neutrality

One additional observation on the WSJ story Paul mentioned.  Much has been written about the strained relationship between the FTC and DOJ in antitrust matters.  There has, of course, never been a more descriptive and entertaining version of these tensions than the one offered by former Chairman and now Commissioner Kovacic who observed that the so-called sister agencies amounted to “an archipelago of policy makers with very inadequate ferry service between the islands” where “too many instances when you go to visit those islands the inhabitants come out with sticks and torches and try to chase you away.”

Its been awhile since that particular description, but the quotes in the Journal article really suggest a remarkable level of tension between the agencies.  Consider:

• Commissioner Rosch describing the DOJ as “an arm of the administration,” that “can and will enforce the antitrust laws only insofar as that is consistent with administration policy;”  or
• Even going so far as to question whether AAG Varney was able to take an unbiased view of health care related matters because of her past representation of the American Hospital Association.

Fairly serious stuff.  Perhaps the Commissioner and AAG just need some topic upon which they can both agree?

The inter-agency clearance fights, and especially the high-profile ones that bring out the sticks and torches, significantly undermine the mission of antitrust enforcement institutions.  Commissioner Kovacic closes the article with the basic, but critical point:   “The fact and appearance of a contest are bad for the coherence,” says Mr. Kovacic. “If you develop a perception that you’re going to get different outcomes depending on where [a deal] goes, your system suffers.”

 

Filed under: antitrust, clearance, doj, federal trade commission

The Wall Street Journal reports major conflicts between the DOJ and the FTC over antitrust jurisdiction.  There are only two of them, and they are not subject to rules against collusion and open agreements.  Nonetheless, they can’t get along and they cannot decide on market division.    Maybe they will take this as information about difficulties of collusion, even in duopoly situations.

Filed under: antitrust, cartels, federal trade commission

Josh and I have just completed a white paper on search neutrality/search bias and the regulation of search engines.  The paper is this year’s first in the ICLE Antitrust & Consumer Protection White Paper Series:

If Search Neutrality Is the Answer, What’s the Question?

 

Geoffrey A. Manne

(Lewis & Clark Law School and ICLE)

and

Joshua D. Wright

(George Mason Law School & Department of Economics and ICLE)

In this paper we evaluate both the economic and non-economic costs and benefits of search bias. In Part I we define search bias and search neutrality, terms that have taken on any number of meanings in the literature, and survey recent regulatory concerns surrounding search bias. In Part II we discuss the economics and technology of search. In Part III we evaluate the economic costs and benefits of search bias. We demonstrate that search bias is the product of the competitive process and link the search bias debate to the economic and empirical literature on vertical integration and the generally-efficient and pro-competitive incentives for a vertically integrated firm to discriminate in favor of its own content. Building upon this literature and its application to the search engine market, we conclude that neither an ex ante regulatory restriction on search engine bias nor the imposition of an antitrust duty to deal upon Google would benefit consumers. In Part V we evaluate the frequent claim that search engine bias causes other serious, though less tangible, social and cultural harms. As with the economic case for search neutrality, we find these non-economic justifications for restricting search engine bias unconvincing, and particularly susceptible to the well-known Nirvana Fallacy of comparing imperfect real world institutions with romanticized and unrealistic alternatives

Search bias is not a function of Google’s large share of overall searches. Rather, it is a feature of competition in the search engine market, as evidenced by the fact that its rivals also exercise editorial and algorithmic control over what information is provided to consumers and in what manner. Consumers rightly value competition between search engine providers on this margin; this fact alone suggests caution in regulating search bias at all, much less with an ex ante regulatory schema which defines the margins upon which search providers can compete. The strength of economic theory and evidence demonstrating that regulatory restrictions on vertical integration are costly to consumers, impede innovation, and discourage experimentation in a dynamic marketplace support the conclusion that neither regulation of search bias nor antitrust intervention can be justified on economic terms. Search neutrality advocates touting the non-economic virtues of their proposed regime should bear the burden of demonstrating that they exist beyond the Nirvana Fallacy of comparing an imperfect private actor to a perfect government decision-maker, and further, that any such benefits outweigh the economic costs.

CLICK HERE TO DOWNLOAD THE PAPER

 

Filed under: announcements, antitrust, economics, error costs, essential facilities, exclusionary conduct, google, law and economics, markets, monopolization, technology, truth on the market Tagged: antitrust, foundem, google, search, search bias, Search Engines, search neutrality, tradecomet, Vertical integration

The press release is here. Notably, the settlement obligates Google to continue product development and to license ITA software on commercially-reasonable terms, seemingly for 5 years.  Frankly, I can’t imagine Google wouldn’t have done this anyway, so the settlement is not likely much of a binding constraint.

Also notable is what the settlement doesn’t seem to do: Impose any remedies intended to “correct” (or even acknowledge) so-called search neutrality issues.  This has to be considered a huge victory for Google and for common sense.  I’m sure Josh and I will have more to say once the pleadings and settlement are available.  Later today or tomorrow we will post a paper we have just completed on the issue of search neutrality.

Unfortunately, this settlement doesn’t put the matter to rest, and we still have to see what the FTC has in store now.  But for now, this is, as I said, a huge victory for Google . . . and for all of us who travel!

Filed under: antitrust, google, mergers & acquisitions Tagged: Federal Trade Commission, google, ITA Software, mergers, search, Search Engines, United States Department of Justice

Larry makes a strong argument below for why the proposed SEC rules changes reported today in the WSJ should not be heralded as some great opening up of US securities markets, but that the changes are little more than political posturing to prevent addressing the real problem of the costs imposed by securities regulation more generally. I don’t disagree that the proposed rules changes Larry targets are, at best, window dressing to release some (well-justified) pressure created by innovative market-based solutions to circumvent the rules that lie more at the root of the securities market problem.  So long as the costs associated with “public” placements are so high, investors and issuers will continue to look for ways to expand their access to capital within the “private” placement market, which by definition excludes many (especially smaller) investors.

That said, I will point out that one of the quotes in the article bemoaning this proposal comes from an institutional investor–one of the groups that is more likely to benefit from the current 500 entity cap. If raising the cap would not open up the market meaningfully to new potential investors, I wouldn’t expect to see such negative comments from one of the groups who will face this greater competition in the supply of private equity. So while the proposed changes certainly don’t address the real problem, it seems they may make the market a bit more open (and less subject to contrived and costly work-arounds like special purpose vehicles) than it currently is.

However, among the rules changes being proposed is one that should open up the market to greater access even to smaller investors (up to whatever new cap might replace the current 500 entity rule). And it’s a rule  change that appears a direct response to something Larry blogged about here just earlier this year.

According to the WSJ report, the SEC “is considering relaxing a strict ban on private companies publicizing share issues, known as the ‘general solicitation’ ban.” The current regulations are currently under Constitutional scrutiny as a potential violation of 1st Amendment speech rights, as a result of a case by Bulldog Investors that Larry discussed in his earlier post.  Again, how far will the ‘relaxing’ go and will it be a substantive change in the underlying problem, or just another hanging of curtains? But there should be no doubt that more open communication about private equity investment opportunities should further open the market to smaller investors.

All this to say, I believe Larry is on point for the big picture, but the proposed regulation changes don’t seem to be all bad. Of course, the devil is in the details–so we’ll have to reserve judgment until the specifics are revealed before having more confidence in that conclusion.

Filed under: disclosure regulation, IPOs, securities regulation, Sykuta

Does anyone really still believe that the threat of antitrust enforcement doesn’t lead to undesirable caution on the part of potential defendants?

Whatever you may think of the merits of the Google/ITA merger (and obviously I suspect the merits cut in favor of the merger), there can be no doubt that restraining Google’s (and other large companies’) ability to acquire other firms will hurt those other firms (in ITA’s case, for example, they stand to lose $700 million).  There should also be no doubt that this restraint will exceed whatever efficient level is supposed by supporters of aggressive antitrust enforcement.  And the follow-on effect from that will be less venture funding and thus less innovation.  Perhaps we have too much innovation in the economy right now?

Reuters fleshes out the point in an article titled, “Google’s M&A Machine Stuck in Antitrust Limbo.”  That about sums it up.

Here are the most salient bits:

Not long ago, selling to Google offered one of the best alternatives to an initial public offering for up-and-coming technology startups. . . . But Google’s M&A machine looks to be gumming up.

* * *

The problem is antitrust limbo.

* * *

Ironically that may make it less appealing to sell to Google. The company has announced just $200 million of acquisitions in 2011 — the smallest sum since the panic of 2008.

* * *

The ITA acquisition has sent a warning signal to the venture capital and startup communities. Patents may still be available. But no fast-moving entrepreneur wants to get stuck the way ITA has since agreeing to be sold last July 1.

* * *

For a small, growing business the risks are huge.

* * *

That doesn’t exclude Google as an exit option. But the regulatory risk needs to be hedged with a huge breakup fee. . . . With Google’s rising antitrust issues, however, the fee needs to be as big as the purchase price.

Filed under: antitrust, business, cost-benefit analysis, google, law and economics, merger guidelines, mergers & acquisitions, technology Tagged: error costs, google, ITA, Venture capital

Fred McChesney is leaving Northwestern (where he is Haddad Professor of Law) for a chair at the University of Miami (HT: Leiter).   As Leiter notes, this is a major pickup for Miami.  McChesney is a first-rate scholar and has done pioneering work in law and economics, public choice, corporate law, and antitrust.   With more and more specialization in law and economics, the number of scholars who make significant contributions using economic theory, empirical work, and understanding of legal institutions is falling over time.  Fred does it all.  And he does it remarkably well.  Congratulations to both Fred and Miami.

Filed under: antitrust, economics, law and economics, law school, markets

Filed under: antitrust, essential facilities, exclusionary conduct, monopolization, net neutrality, technology Tagged: Competition law, FCC, Federal Communications Commission, Free Press, Monopoly, net neutrality, Network neutrality, regulation, Telecommunications Act