Research Programs
More
What are you looking for?
Showing Latest Publications
ICLE Issue Brief Abstract Once the jurisdiction that most clearly embraced a market-led approach to open banking, the United States appears on the verge of shifting to a . . .
Once the jurisdiction that most clearly embraced a market-led approach to open banking, the United States appears on the verge of shifting to a regulator-driven regime, with mandated sharing of financial data. More specifically, the U.S. Consumer Financial Protection Bureau (CFPB), relying on Section 1033 of the Dodd-Frank Act, recently proposed rules governing “personal financial data rights.” The rulemaking appears to follow the lead of the European Union (EU), which has long been at the forefront of government-led open banking. This paper seeks to analyze the CFPB proposal through the prism of the EU experience. A review of the EU’s regulatory framework, and particularly its implementation in the United Kingdom, may offer useful insights about the challenging tradeoffs posed by open banking, and thus permit an assessment of whether the CFPB proposal would add value, or simply represent an unnecessary regulatory burden
Following instructions laid out by President Joe Biden in his 2021 executive order on “Promoting Competition in the American Economy,”[1] the U.S. Consumer Financial Protection Bureau (CFPB) in October 2023 promulgated a “Personal Financial Data Rights” rulemaking to facilitate the portability of consumer banking and financial data.[2] The proposal would activate a to-date dormant provision of Section 1033 (the Consumer Financial Protection Act) of the Wall Street Reform and Consumer Protection Act of 2010 that was intended to accelerate a shift toward so-called “open banking.”[3] Open banking—a term that, in the United States, is frequently used to encompass “open finance” more broadly—refers to a financial-services environment built on interoperability and data-driven services that allows customers to leverage their transaction and financial data, and imposes on financial institutions a duty to share such data, on customers’ request, with third-party providers (TPPs).
Under open banking, financial institutions’ customers gain effective control of their data, as well as the opportunity to benefit from more competitive services enabled by the application of technological innovation to banking and finance (“fintech”). Given access to, and the ability to process, large troves of data (including nonfinancial data—e.g., digital footprints), fintech-enabled products can serve to promote financial inclusion, mitigate consumers’ unwillingness or inability to switch among firms, and help financial consumers to make informed choices and to shop around for the most convenient deals.[4] Open banking is therefore broadly expected to generate substantial benefits for businesses, consumers, and the economy as a whole.
Alongside those opportunities, however, financial innovation also poses several new concerns about consumer protection. Notably, the systematic digitization of financial transactions introduces potential for discrimination, manipulation, and exploitation of vulnerable customers.[5] Considering both consumers’ generally low levels of digital and financial literacy, and the opaque nature of algorithmic decisionmaking, they could be forced to make exceedingly complex choices among tradeoffs, and may be exposed to novel privacy and security risks. Even in cases of truly informed consent, the consumer-welfare impact of the enhanced fintech competition enabled by data sharing could be ambiguous.[6] Further, the emergence of new participants in the delivery of banking and financial services may negatively affect both competition and the financial system’s stability.
For all these reasons, designing a regulatory framework fit for purpose requires sensitive policy decisions about common standards for customer data and technical interfaces; solutions to allow customers to manage data permissions; eligibility rules and requirements for third parties seeking access to data; and the role of data aggregators.
The EU and UK have been at the forefront of the open-banking movement, having inspired other countries to follow their direction (e.g., Australia, Brazil, India, Mexico, Singapore). Those two jurisdictions are also currently evaluating proposals to extend their open-banking regulatory frameworks to “open finance” more broadly. A comparative analysis of the approaches adopted and models developed the EU and UK would therefore aid U.S. policymakers looking to strike the proper balance in the promises and perils of open banking.[7] Among the notable lessons to draw from the EU and UK experience include how those jurisdictions have sought to adopt a harmonized application programming interface (API) standard; to facilitate data access and create incentives to develop high-quality APIs; to define a regulatory framework for access to financial-information data; and whether to make banking and financial data available to nonfinancial companies (in particular, to so-called “Big Tech” platforms).
By taking stock of the EU experience and focusing on those provisions most relevant to innovation and competition, this paper aims to assess the CFPB’s proposal by investigating open banking’s challenging tradeoffs, identifying key features for its effective functioning, and providing policy suggestions for the forthcoming U.S. implementation.
The paper is structured as follows: Section II illustrates the economic rationale and challenges of regulatory-driven open-banking processes. Section III provides an overview of the EU and UK frameworks, while also analyzing recent proposals to facilitate open finance. Section IV analyzes the U.S. proposal, drawing attention to relevant differences from the EU context. Section V concludes.
Legislative initiatives to promote open banking belong to a more general wave of regulatory interventions intended to empower individuals with more control over data and to thereby unlock competition and innovation in both new and traditional markets.
The details vary from jurisdiction to jurisdiction and sector to sector, but data-sharing obligations generally include both data portability and interoperability. The former describes the ability to port from one platform to another any bulk data created through an individual’s use of a particular service. Data portability does not require systemic use of APIs, as it is accomplished via a one-time transfer at a specified point in time.[8] In contrast, open banking involves the creation of an in situ data right; i.e., rather than moving data among platforms, users are permitted to use their data within a given platform ecosystem and determine when and under what conditions third parties can access that in situ data.[9] Therefore, it represents a form of interoperability and, more specifically, belongs to the subcategory of data interoperability. Data interoperability refers to the ability to share and access data on a continuous and real-time basis, usually through APIs.[10]
Because market dynamics are shaped by consumer behavior, open-banking advocates assert that enhancing consumer engagement can play a crucial role in fostering effective competition. The fundamental policy objective of such data-sharing regulatory initiatives is to lower switching costs and avoid personal data lock-in by allowing consumers to switch smoothly or multi-home across platforms. In the case of open banking, this consumer empowerment is believed to strengthen their bargaining position with respect to banks. By gaining effective control of their own transaction data and allowing select TPPs to access such data, it is believed that consumers would be able to make informed choices among various banking and financial products and, with the help of data-driven tools, that they could receive personalized suggestions with the help of big-data analytics applied to their own economic behavior.
In summary, the goal of open banking is to increase competition, spur innovation, and make the market more contestable through data sharing. This is well-illustrated by the UK experience where, as we will see (infra Section III.C), the antitrust authority put forward data-sharing requirements as a regulatory remedy after a market investigation of the retail and business-banking sectors found weak competitive dynamics, including a high degree of market concentration and an extremely low switching rate.[11] UK authorities have even sought to measure the “loyalty penalty” that longstanding customers tend to pay for their inertia, estimating average annual gains they could realize from switching.[12]
Some open-banking proponents therefore seek to justify regulatory intervention on traditional market-failure grounds, noting that the banking sector in many countries suffers chronic deficiencies in its competitive dynamics. Without a legislative obligation to share date, banks may have valid reasons to decline access to or withhold sensitive information from TPPs, due to concerns about intellectual property, security, potential reputational risks, and liability issues.[13]
Nonetheless, it should also be noted that “open banking” does exist even where there is no regulatory mandate to share data. Indeed, even where banks are unwilling to collaborate with TPPs, third parties may gain access to customers’ accounts via screen scraping.[14] Screen scraping happens when consumers share their credentials with TPPs, who in turn impersonate the consumer, leaving them without control regarding what data is collected and how it is used and disclosed. The practice is known to increase the risks of inaccuracies, fraud, and data breaches. Indeed, the prevalence of screen-scraping practices may provide additional justification for open-banking regulations, as they represent a risky data-collection practice inconsistent with cyber-security best practices.
These concerns are further heightened by the fact that screen scraping allows TPPs access to all consumer data, rather than only those needed to provide payment and financial services. Therefore, open-banking proposals have also been advanced to guarantee consumer protection by providing a secure framework and ensuring a shift from screen scraping to developer interfaces (usually, credential-free APIs maintained by data providers or their service providers) as the most common means to access consumer data.[15] This would, it is argued, further enhance consumer trust in data sharing.
While there is consensus that developer interfaces should supplant screen scraping, significant disagreements have emerged around API standardization. Advocates particularly disagree about whether policymakers should mandate adoption of a common API standard or embrace a market-led approach that would leave banks free to develop their own interfaces or participate in privately led standardization initiatives.[16]
On the one hand, a common API standard could jeopardize dynamic competition among standards and undermine market incentives to innovate and develop high-quality interfaces. On the other hand, fragmented API standards could exacerbate the costs of interoperability, which in turn could translate into higher barriers for new entrants.[17] The unintended consequences that may arise from the absence of standardization are arguably worsened by conflicting interests among market participants—notably the lack of incentives for banks to grant access to TPPs.
Moreover, doubts have been expressed about how effective mandatory data sharing actually is in promoting competition. Growing concerns have emerged about financial-stability and monetary-policy risks generated by the entry of new players into the banking and financial-services industries.[18] Indeed, while open-banking regulations were intended primarily to create opportunities for fintech startups, whose services are otherwise constrained by lack of access to customer transaction data, the data-sharing obligations imposed on banks also tend to benefit unregulated financial-services players.
Notably, data-access rules have favored the entry of “Big Tech” firms, which initially entered the finance sector through payment services, but have swiftly diversified their offerings to include credit, insurance, and savings and investment products. While it remains unclear whether fintech startups will be able to compete effectively with legacy banks, rather than cooperate with them by providing complementary services,[19] Big Tech may represent a significant competitive threat to banks. The large tech platforms may be able to scale up quickly in financial markets by exploiting proprietary datasets derived from their non-financial operations (as well as analytical skills and advanced technologies) in order to provide consumers with personalized offers.[20] In this regard, from a competitive standpoint, there have also been questions about the asymmetric nature of data-sharing provisions that, in contrast with the goal of ensuring a level informational playing field, impose on banks a duty to grant access to TPPs without including a reciprocal obligation on the latter that would equally allow banks to enhance digital services.[21]
Further shortcomings and perils are associated with the role played by data aggregators (also known as API aggregators or API hubs). Emerging in response to the multiplicity of bank APIs available on the market, data aggregators act as intermediaries between banks and TPPs by integrating various APIs to offer a single implementation point for TPPs. From a technical perspective, data aggregators bring enhancements to the open-finance ecosystem. Indeed, providing a standardized API—irrespective of the specific APIs or services integrated—allows TPPs to seamlessly connect with various APIs without the need to handle the configuration and formatting intricacies of data and interfaces.
Data aggregators, however, also pose risks of market dominance.[22] Notably, due to their advantageous scale and extensive access to consumer financial data, the market might favor only a handful of major players. In other words, especially in a highly fragmented financial-services market, such as the United States, data aggregators may attract a critical mass of API-software developers that benefit from the same data-accumulation economics that may favor industry concentration and the entrenched dominant position of some Big Tech firms (i.e., strong economies of scale, scope, and network effects).[23] In addition, the API connection service delivered by aggregators can be viewed as a factor contributing to inefficiency, as it elongates transaction chains and introduces costs due to the fact that it is provided against compensation.
By and large, open banking’s rationale, aims, and tradeoffs suggest that one size does not fit all. Therefore, jurisdictions evaluating policy interventions to facilitate data sharing in banking and finance should adopt a tailored approach, taking stock of other countries’ experiences to carefully assess the benefits and drawbacks of market-led and regulatory-led regimes, respectively.
From a regulatory perspective, the EU led the way in open banking by introducing a sector-specific data-access right in 2015. The jurisdiction is now on the verge of further extending its legal framework to embrace open finance. While based on the same framework, the UK adopted a different technological model for standardizing data-sharing interactions between banks and TPPs, which has become noteworthy as one of the most advanced examples of mandated interoperability. Further, the EU’s ongoing review of its regulatory regime may offer some useful insights about both the successes and shortcomings of open banking, as well as how it compares to the UK regime.
The EU and UK therefore represent useful benchmarks for U.S. policymakers interested in incorporating the lessons learned from those experiences. Recent proposals in both the EU and UK to go beyond payment-account data in order to promote access to financial data could be equally relevant to the United States, as the CFPB’s rulemaking aims to facilitate a form of open finance.
The EU’s 2015 Directive on Payment Services (PSD2) introduced the access-to-account rule (XS2A rule), which requires account-servicing payment-service providers (ASPSPs) to share, upon user request, real-time data on customers’ accounts with TPPs—both payment-initiation service providers (PISPs) and account-information service providers (AISPs)[24]—as well as to execute payment orders.[25] PSD2 enables access without need for a contractual relationship between the ASPSPs and TPPs, and thus without compensation.
While open banking existed in the EU prior to PSD2, the directive’s aim was to provide a secure regulatory framework. Previously, TPPs operated in a largely unregulated environment and accessed customers’ accounts primarily by screen scraping.[26]
Under PSD2, data access is facilitated either through APIs, or by granting TPPs direct access to payment data using the interface that banks employ for customer interactions (customer-facing interface). In order to safeguard business continuity for TPPs, PSD2 requires ASPSPs that opt for a dedicated interface (PSD2 API) to also provide an alternative interface to TPPs (a fallback interface) in the event of malfunction or other issues with the dedicated interface. To facilitate the objective of promoting competition and innovation, PSD2 and its implementing regulatory technical standards (RTSs) chose not to impose a unique API standard; nearly 10 years later, there is still no single pan-European open-banking API standard.
A recent evaluation report concluded that PSD2 has been successful in reducing fraud via the introduction of strong customer authentication (SCA), which involves two authentication factors based on either knowledge (e.g., a password), possession (e.g., a card) or inherence (e.g., a fingerprint).[27] The report, however, also found that PSD2 was only somewhat effective in achieving a level playing field, and was a mixed success in the uptake of open banking in the EU.[28] Indeed, there have been recurrent issues as regards TPPs lacking effective and efficient access to data held by ASPSPs, with a particular imbalance between bank and nonbank service providers.[29]
Notably, the review found that neither ASPSPs nor TPPs are fully satisfied with the current situation.[30] The latter regularly complain about the performance of data-access interfaces, reporting that they experience difficulties in providing basic services due to inadequate and low-quality PSD2 APIs.[31] TPPs also note that, as API standards are set by the industry, this fragmentation leaves them in the disadvantageous position of bearing the costs of developing separate solutions to access different banks’ APIs.[32]
For their part, ASPSPs also express dissatisfaction, reporting significant implementation costs to develop APIs, as well as objections that PSD2 precludes them from charging TPPs for access to customer data.[33] In other words, banks perceive open banking purely as a regulatory burden, and argue that the free access does not offer incentives to create the best possible APIs.[34] Banks are similarly dissatisfied with the low use of their APIs, raising complaints that API aggregators pass on user data to unregulated third parties.[35]
Despite these findings on the imperfect functioning of open banking in the EU, the European Commission has chosen not to pursue radical changes.[36]
With regard to TPPs’ complaints, while acknowledging that a different solution might offer better access to data, the Commission’s proposed amendments to PSD2 do not include imposing a fully standardized EU data-access interface, on belief that the costs of introducing a new single API standard would outweigh the benefits.[37] Indeed, the Commission notes that, despite the existence of different API standards in the EU, the existing PSD2 API standards have substantially converged over time toward two primary solutions (i.e., the Berlin Group standard and the STET standard).[38] In addition, even if not envisaged by PSD2, the emergence of API aggregators that offer a paid alternative to a PSD2 API standard has lowered frictions arising from fragmented API standards.[39]
Nonetheless, starting from the premise that screen scraping should be out of bounds,[40] the proposal suggests streamlining the regime by removing the two interface requirements (i.e., a principal interface and a fallback interface) and imposing, as a general rule, mandatory use of APIs designed and dedicated for open-banking purposes to provide data access to TPPs.[41] Moreover, to ensure TPPs’ business continuity and ability to provide high-quality services to clients, the proposal would grant them the right to benefit from “data parity,” with the customer interface provided by ASPSPs to their users.[42]
In the same way, in response to banks’ requests to modify the PSD2 to allow for compensation to facilitate access to data, the proposed amendments would safeguard the current regime (i.e., TPPs benefiting from the PSD2 baseline services without contractual agreement or charging) but would allow contractual relationships to be established, accompanied by compensation for services that go beyond those required by the PSD2.[43] This would allow the development of “premium” APIs to provide transaction information from other types of accounts (e.g., savings accounts) and allow the schedule of recurring payments.[44]
Finally, to increase trust in open banking and empower consumers to be in full control of their data, the proposal would require ASPSPs to make a dashboard available for customers to monitor data access granted to open-banking service providers, and to easily withdraw or re-establish that access.[45]
Alongside proposals to revise PSD2, the European Commission has also delivered a legislative proposal on data access to financial information (FIDA), which would complement the XS2A rule with an obligation to provide access to financial data.[46]
The FIDA proposal builds on the same rationale as PSD2—i.e., promoting competition and innovation in a data-driven ecosystem by entrusting customers of financial institutions (i.e., both consumers and firms) with effective control over their financial data to benefit from financial products and services tailored to their needs.[47] The wording of the aims section of the proposal clearly resembles PSD2. According to the proposal, the lack of personalized financial products hinders the potential for innovation, as it restricts the ability to provide a broader range of choices and financial services to consumers who could otherwise gain advantages from data-driven tools that help them make informed decisions, easily compare offerings, and switch to more favorable products aligning with their preferences based on their data.[48] A particular emphasis is placed on small players, as they are assumed to suffer most from existing barriers to business-data sharing.[49]
In addition, the FIDA proposal adopts the same approach as PSD2 (confirmed by its proposed revision) toward the lack of reciprocity in data-access obligations. As mentioned above, this approach has garnered criticism for being at-odds with the proclaimed goal of leveling the informational playing field. Against the risk of favoring Big Tech firms over financial incumbents and new fintech entrants, the Commission notes that the Digital Markets Act (DMA)[50] would ensure reciprocity in data access between financial-sector firms and large technology companies.[51] Indeed, under the DMA, gatekeeper platforms are required to ensure real-time access to data provided or generated on the platform by business users and consumers in the context of core platform services.
But to safeguard financial stability, market integrity, and consumer protection, the proposal lays down eligibility rules on access to customer data, establishing that the latter can be accessed only by regulated financial institutions or firms authorized as financial-information service providers (FISPs).[52] The provision applies the principle of “same activity, same risks, same rules,” according to which all financial-market participants that carry out the same activity and generate the same risks ought to be subject to the same standards for consumer protection and operational resilience.[53]
In a nutshell, the FIDA initiative is intended to extend the open-banking framework to open finance, and it proceeds from the same customer-centric approach, building on the lessons learned in the PSD2 review.[54] Therefore, while the FIDA proposal includes the same amendments related to data-access permission dashboards for customers,[55] it differs significantly from the proposed revision of PSD2 with regard to envisaged solutions against the risk of a low-quality and fragmented API landscape.
Notably, the FIDA proposal explicitly acknowledges that making data available via high-quality APIs is essential to facilitate seamless and effective access to data. Seeking to safeguard incentives for data holders to invest toward this aim, the proposal declares that is appropriate to allow them to request reasonable compensation from data users.[56] Such a solution would be in line with the principle recently introduced in the Data Act of a contractual data-sharing model.[57] Accordingly, under the FIDA proposal, a data holder may claim compensation only if the customer data is made available to a data user in accordance with the rules and modalities of a financial-data-sharing scheme.[58]
Moreover, as the consultation strongly indicated that the lack of standardization is a major obstacle to data sharing in finance,[59] the FIDA proposal imagines that market participants would be required to jointly develop common standards for customer data and interfaces as part of these financial-data-sharing schemes.[60] The option to empower European supervisory authorities to develop a single EU-wide standard for the entire financial sector was discarded because of its perceived drawbacks, complexity, and overall costs. More specifically, it was considered unlikely that a single standard would satisfy the diverse needs of data users in different segments of the financial-services industry, and that it would be challenging for public authorities to keep pace with technical developments by updating standards in a timely manner.[61]
The explanation proffered for this apparent discrepancy between open banking and open finance in the EU is simply one of path dependence. As open finance is an emerging market that would be regulated for the first time, it has no legacy compensation regime and no investments in APIs already made; therefore, it is believed there would be no risk of disruption.[62]
Building on the same framework as PSD2, the UK opted for a more extensive and invasive implementation of the XS2A rule. Indeed, while PSD2 is technology-agnostic, the UK promoted a standardized model of open banking. Notably, the UK Competition and Markets Authority (CMA) required the nation’s nine largest banks (CMA9) to agree on common and open API standards, data formats, and security protocols that would allow TPPs to connect to customers’ bank accounts according to a single set of specifications.[63] Further, a special-purpose entity, funded by the CMA9, was created to oversee the rollout of API standards and support parties in the use of such standards.
The CMA decided to promulgate this remedy after a review of the retail-banking sector found perceived structural and longstanding competitive weaknesses.[64] In particular, the UK antitrust authority investigated whether there were barriers constraining banks’ ability to enter or expand competition in personal current accounts (PCAs), whether weak customer response was a result of lack of engagement and/or barriers to searching and switching that dampened banks’ incentives to compete, and whether the level of concentration had an adverse effect on customers. The investigation revealed that the market was concentrated and, despite variations among banks in prices and quality, market shares remained stable over time. Indeed, the four largest UK banks accounted for more than 70% of consumers’ primary PCAs and had collectively lost less than 5% market share since 2005.[65] Further, the market study found that a substantial proportion of customers were paying above-average prices for below-average service quality, thus suggesting they would be better off switching products.[66]
Despite these premises, customer engagement was low. The survey reported that more than a third of respondents had been with their primary PCA provider for more than 20 years, over a half for more than 10 years, and only 8% of customers had switched PCAs to a different bank over the past three years.[67] Such results were even more significant when compared to switching rates in other sectors.[68]
Seven years since its introduction, the UK celebrates the success of its open-banking model, claiming significant take-up and accelerating growth. Today, more than 7 million consumers and businesses (of which 750,000 are small to medium-sized enterprises) use open-banking-enabled products and services.[69] The data show that customers show positive sentiment toward open banking, believing they are in better control of their personal finances. Most TPPs likewise find that the API-standardized implementation has been particularly effective.[70] For these reasons, the UK Government has announced the launch of open finance—i.e., its intention to extend its open-banking model beyond payment accounts to a broader range of financial services and products.[71]
The perceived success of the UK version of open banking was confirmed when an identical model was adopted in Australia, where the Australian Competition and Consumer Commission required the four major banks to share product-reference data with accredited data recipients and mandated the adoption of a single set of API standards for data sharing.[72] Australia’s open-banking requirements are part of an ambitious legislative initiative to introduce an economy-wide data-sharing framework, tested initially in banking and energy, and expected to eventually be extended to telecommunications, pensions, insurance, and other areas.
Once the jurisdiction that most clearly embraced a market-led approach to open banking and open finance, the United States appears on the verge of shifting toward the EU’s prescriptive and regulator-driven regime, with mandated sharing of financial data.
In 2021, the White House encouraged the CFPB to intervene in the banking market to “promote competition” consistent with the objectives stipulated in Section 1021 of the Dodd-Frank Act and, in particular, to consider commencing rulemaking under Section 1033 of the Dodd-Frank Act to facilitate the portability of consumer-financial-transaction data.[73] Section 1021 entrusts the CFPB with ensuring that all consumers have access to markets for consumer financial products and services, and that these be “fair, transparent, and competitive.” Section 1033 establishes that, subject to certain exceptions, any person that engages in offering or providing a consumer financial product or service shall make available to a consumer, upon request, information in its control concerning that product or service that the covered person obtained from said consumer. In addition, the CFPB shall prescribe standards applicable to covered persons to promote the development and use of standardized formats for information, including through the use of machine-readable files, to be made available to consumers under this section.
As a consequence of the White House’s 2021 executive order on competition, the CFPB in October 2023 proposed a Personal Financial Data Rights rule to activate the aforementioned provisions enacted by the U.S. Congress more than a decade ago.[74] Notably, in addition to ensuring that consumers can access covered data in electronic form from data providers, the proposed regulation would delineate the scope of data that TPPs can access on a consumer’s behalf, the terms on which data are made available, and the mechanics of data access.
First, the CFPB chose to prioritize certain types of consumer accounts. The scope of the rulemaking includes as covered entities those providing asset accounts subject to the Electronic Fund Transfer Act and Regulation E; credit cards subject to the Truth in Lending Act and Regulation Z; and related payment-facilitation products and services, and, as covered data, transaction information; account balances; information to initiate payment to or from a Regulation E account; terms and conditions; upcoming bill information; and basic account-verification information.[75]
The rulemaking also requires data providers to establish and maintain a developer interface for third parties to access consumer-authorized data under certain performance and security specifications.[76] In particular, the CFPB established that the performance of a developer interface cannot be commercially reasonable unless it has a response rate of at least 99.5 percent within 3.5 seconds. Despite the costs incurred to meet these requirements, the CFPB suggested forbidding data providers from imposing access caps and levying any direct fee for fulfilling a request.[77]
Further, the rulemaking seeks to promote standardization by supporting industry standards appropriately developed within a data-access framework (“qualified industry standard”).[78] Due to concerns about the pace of technological change,[79] rather than dictating technical standards, the CFPB suggested that indicia of compliance with certain provisions must include conformance to an applicable industry standard issued by a fair, open, and inclusive standard-setting body.[80]
The CFPB’s rulemaking builds on Section 1033 of the Dodd-Frank Act. As noted by some scholars, however, Section 1033 is “silent” on the core principles of open banking.[81] Indeed, the provision creating a data-access right for consumers does not expressly impose on financial institutions a duty to share such data with third parties. Therefore, in contrast with the EU PSD2, it is far from clear whether there is a legislative mandate authorizing the CFPB to promote open banking via interoperability obligations. Indeed, the lack of a clear regulatory mandate is arguably what has allowed a market-driven approach to open banking to emerge in the United States over the last 14 years.
More importantly to the present analysis, the U.S. context differs significantly from the EU, raising questions about the justification for regulatory intervention. These doubts involve both the spread of poor technological-data-access solutions and the respective markets’ structural competitive weaknesses. Regarding the former, the CFPB proposal places significant emphasis on screen scraping. CFPB Director Rohit Chopra has described the current regime as “broken,” with consumer access based on a set of unstable and inconsistent norms across market participants and with many companies accessing consumer data through activities like screen scraping.[82] The proposal thus seeks to move the market away from these risky data-collection practices.[83]
But while acknowledging that screen scraping has allowed open banking to grow quickly in the United States,[84] the CFPB also reports that a large and growing number of consumers currently access their financial data through consumer-authorized third parties, and that the share of access attempts made through screen scraping has declined by a third since 2019.[85] According to the CFPB, the recent growth in traffic through credential-free APIs reflects the technology’s adoption by some of the largest data providers, covering tens of millions of covered accounts.[86] The bureau estimates that API use has grown substantially over the last five years, as the annual number of consumer-authorized access attempts approximately doubled from 2019 to 2022.[87] The U.S. market therefore already appears to be moving away from screen scraping and toward the use of APIs.
Moreover, the U.S. banking and financial-services sector is characterized by a large degree of fragmentation. As noted in the literature, such extreme fragmentation is “stark” when compared with the EU and other jurisdictions that have adopted open banking and open finance.[88] In response, U.S. financial institutions have undertaken initiatives to promote API standards, which already include private standard-setting bodies such as the Financial Data Exchange (FDX). The result has been a commingling of financial institutions, data aggregators, fintechs, payment networks, and consumer groups with the objective of “unifying the financial services ecosystem around a common, interoperable and royalty-free technical standard for user-permissioned financial data sharing.”[89]
But such efforts for industry-supported API standards have been controversial.[90] Indeed, an additional peculiar feature of the U.S. financial-services industry is the emergence of a relatively concentrated data-aggregation market, where a handful of players serve the entire sector.[91]
In summary, while the two primary rationales for regulator-driven open banking in other jurisdictions are chronic deficiencies in market contestability and the widespread use of screen scraping, neither of these features are present in the U.S. scenario. Since regulatory intervention is context-dependent and entails complex tradeoffs and sensitive choices (see supra Section II), the absence of these justifications raises doubts about the potential added value of the CFPB’s initiative—specifically, whether any benefits to innovation, competition, and consumer choice will outweigh regulatory costs.
While the marked differences between the U.S. and EU landscapes raise questions about the rationale for a U.S. shift toward regulator-led open banking, a glance at the EU’s recent review of its open-banking regime underscores the degree to which the proposed CFPB framework may represent an unnecessary regulatory burden. In particular, there should be significant doubts about the competitive implications of the proposed rules, and particularly about the degree to which they would serve to ensure quality data-sharing and a level informational playing field.
Indeed, the CFPB’s primary justification for top-down intervention is to outlaw screen scraping, which is unanimously considered worrisome for data privacy, security, and accuracy.[92] The EU FIDA proposal highlights data accuracy as especially key for competition, noting that making data available via high-quality APIs is essential to facilitate effective access.[93] The CFPB proposal likewise assumes that the quality of data provided through open-banking APIs is greater than that collected through screen scraping.
But the recent review of the EU PSD2 noted TPPs’ dissatisfaction with the performance of data-access interfaces.[94] Notably, many TPPs complained that, despite the high costs of implementation, APIs are implemented differently and don’t always work.[95] At the same time, banks complain about the costs of PSD2 compliance, arguing that the mandated free access leaves them no incentive to offer the best possible APIs.[96] Given the significant implementation costs to develop high-quality APIs, the European Commission has supported a proposal to allow data holders to request reasonable compensation from data users.[97] More generally, the EU Data Act affirms that it is desirable to provide remuneration for data under fair, reasonable, and non-discriminatory (FRAND) terms in order to promote investment and safeguard appropriate incentives to develop high-quality interfaces.[98] Such compensation might include not only the costs incurred to make the data available, but also a margin to account for such factors as the volume, format, or nature of the data. By contrast, the CFPB proposal would impose performance specifications for the developer interface while forbidding any fee or charge in connection with establishing the required interface or receiving requests to make covered data available.[99]
Other CFPB provisions are inconsistent with open banking’s procompetitive goal of levelling the informational playing field. Notably, the CFPB replicates the asymmetric treatment imposed on financial institutions by the PSD2 (as well as by the current EU proposals), under which banks and other lenders have a duty to share account data, while no reciprocal obligation is imposed on data recipients. Restricting access and use of data may serve to hinder development of innovative products or services, and a bidirectional access-to-data-account rule in PSD2 could have been used to enhance digital-payment services. A system in which all eligible entities participate would be more dynamic and promote greater competition. Therefore, in principle, there is good reason to establish that accredited data recipients in a designated sector should also be obliged to provide equivalent data in an equivalent format, in response to a consumer request.[100] Further, an unbalanced data-sharing burden risks over-empowering new players (i.e., fintechs, Big Tech, and data aggregators) relative to legacy banks.
In a similar vein, the CFPB’s blanket prohibition on secondary data use could yield further anticompetitive shortcomings by imposing limits on data flows—namely on the use of covered data for targeted advertising and cross-marketing, even when those data are de-identified.[101] Indeed, such restrictions are at odds with core open-banking principles. As open banking is consumer-centric and aims to promote consumer empowerment to spur innovation and competition, it should abandon purely paternalistic approaches focused only on consumers’ vulnerabilities. Instead, open-banking principles inherently endorse a proactive strategy based on consumers’ ability to manage their data and choose which parties should use it to offer new products and services.[102] An outright ban on targeted advertising and cross-marketing instead reduces consumer choices and their opportunities to discover new products and services. By further hindering the level informational playing field, such a prohibition would favor incumbents over newcomers and challengers.
Finally, following the EU, the CFPB would adopt an open-banking regime with mandatory data sharing, but without regulator-supplied technical standards. Similar to EU policymakers—and in contrast with UK and Australian regulators—the CFPB argues that detailed technical standards are too complex and unsuited to the pace of technological change, even though they would be particularly well-suited to the excessively fragmented U.S. market.[103] In supporting the development of common standards through standard-setting organizations, the CFPB’s proposal is similar to the European FIDA proposal, although the latter mandates participation by financial institutions, data holders, and data users in data-sharing schemes. Indeed, under the FIDA proposal, data that falls within the scope of the sharing obligation would only be available to members of a financial-data-sharing scheme.
The concerns about whether such an invasive intervention will be “future proof” are compelling, especially given the size of the U.S. financial market. But a UK-style remedy would at least be effective against the only potential risk of market dominance—that of a small handful of data aggregators emerging as a response to the peculiar fragmentation of the U.S. market. In this regard, there should be doubts about whether it will be effective to entrust standard-setting bodies to develop “qualified” standards within the CFPB’s framework.[104] In particular, it is unclear what value would be added relative to the way that market-led open banking is currently delivered in the United States, as it already includes industry standard-setting initiatives (e.g., FDX). Subjecting standard-setting organizations to CFPB vetting regarding their fairness, openness, and inclusiveness does not seem like a game changer. On the contrary, it appears to be just another unnecessary regulatory burden, apparently unfit to address the purported risks of standards controlled by dominant incumbents or intermediaries, thus “enabl[ing] rent-extraction and cost increases for smaller participants.”[105]
Following the EU and the UK, about 80 countries have recently engaged in government-led open-banking initiatives.[106] The United States is on the brink of joining the club. But even without a regulatory framework to mandate data sharing, open banking is already flourishing in the U.S. market. Therefore, it’s important to understand why the country that has been at the forefront of market-driven open banking would shift to a compulsory regime, as well as what model inspired this change.
The EU’s regulator-driven open-banking regime relies on the twofold rationale of promoting fintech competition and safeguarding consumers from screen-scraping practices. But the EU’s background differs significantly from the U.S. scenario. Rather than being highly concentrated, the U.S. market seems paradoxically to suffer from the opposite problem—namely, excessive fragmentation. As a result, the competitive issue that has emerged in the United States is one of market concentration at the intermediary level (i.e., data aggregators), rather than upstream (i.e., banks). Moreover, as the CFPB acknowledges, the U.S. market has already been moving away from screen scraping, as testified by the exponential increase in the number of consumer-authorized access attempts in recent years.
The state of the U.S. open-banking ecosystem also flies in the fact of the traditional market-failure justification for regulatory intervention. In disregarding the peculiar features of the U.S. context, the CFPB’s proposal may miss badly in selecting effective technical solutions. Indeed, by replicating the EU approach, rather than the UK implementation, the CFPB discards the option of imposing single U.S.-wide standard because of its cost, complexity, and dynamic innovation shortcomings. While these concerns are well-founded, at the very least, an invasive technological solution would address the only potential competitive issue in the U.S. market, which is the role of data aggregators. Moreover, the CFPB ignores some useful insights from the recent review of the EU experience, which recommends allowing incentives to develop high-quality APIs by compensating banks for their efforts.
For all these reasons, there should be significant concerns about whether the CFPB’s initiative is needed and to extent to which such a top-down intervention would add value in the U.S. market.
Despite the ambiguous effects and challenging tradeoffs of open banking, it has been trendy of late and the government-led version has become widespread around the world. It is worth remembering, however, that regulatory models do not work in a vacuum. They are context-dependent and can be more or less effective depending on the particular features of the markets and countries involved. More importantly, regulation is not inherently preferable to market-led solutions. Regulation is just a pill for a disease—ideally, the cure for a market failure. If the latter is missing or is not properly detected, consumers effectively be asked to pay the price for an unneeded dress, however stylish it might be.
[1] Executive Order on Promoting Competition in the American Economy, White House (Jul. 9, 2021), https://www.whitehouse.gov/briefing-room/presidential-actions/2021/07/09/executive-order-on-promoting-competition-in-the-american-economy.
[2] Required Rulemaking on Personal Financial Data Rights, Docket No. 2023-CFPB-0052, U.S. Consumer Financial Protection Bureau (Oct. 19, 2023), https://www.consumerfinance.gov/rules-policy/notice-opportunities-comment/open-notices/required-rulemaking-on-personal-financial-data-rights.
[3] Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, 12 USC 53 (2010), §1033.
[4] See, e.g., Tania Babina, Saleem Bahaj, Greg Buchak, Filippo De Marco, Angus Foulis, Will Gornall, Francesco Mazzola, & Tong Yu, Customer Data Access and Fintech Entry: Early Evidence from Open Banking (NBER Working Paper 32089, Jan. 2024), http://www.nber.org/papers/w32089; Tobias Berg, Valentin Burg, Ana Gombovic, & Manju Puri, On the Rise of Fintechs: Credit Scoring Using Digital Footprints, 33 Rev. Financ. Stud. 2845 (Sep. 12, 2019); Thomas Philippon, On Fintech and Financial Inclusion (NBER Working Paper No. 26330, Sep. 2019), https://www.nber.org/papers/w26330.
[5] See, e.g., Access to Finance for Inclusive and Social Entrepreneurship. What Role Can Fintech and Financial Literacy Play? (OECD Local Economic and Employment Development (LEED) Papers, 2022), https://www.oecd-ilibrary.org/industry-and-services/policy-brief-on-access-to-finance-for-inclusive-and-social-entrepreneurship_77a15208-en; Isil Erel & Jack Liebersohn, Can Fintech Reduce Disparities in Access to Finance? Evidence from the Paycheck Protection Program, 146 J. Financ. Econ. 90 (Oct. 2022); Yoke Wang Tok & Dyna Heng, Fintech: Financial Inclusion or Exclusion? (IMF Working Paper No. 80, May 6, 2022), https://www.imf.org/en/Publications/WP/Issues/2022/05/06/Fintech-Financial-Inclusion-or-Exclusion-517619.
[6] See, e.g., Zhiguo He, Jing Huang, & Jidong Zhou, Open Banking: Credit Market Competition When Borrowers Own the Data, 147 J. Financ. Econ. 449 (Feb. 2023); Christine A. Parlour, Uday Rajan, & Haoxiang Zhu, When FinTech Competes for Payment Flows, 35 Rev. Financ. Stud. 4985 (Apr. 27, 2022).
[7] For an overview of the international landscape, see Babina et al., supra note 4; Shifting from Open Banking to Open Finance: Results from the 2022 OECD Survey on Data Sharing Frameworks (OECD Business and Finance Policy Papers, 2023), https://doi.org/10.1787/9f881c0c-en.
[8] Daniel Schnurr, Switching and Interoperability Between Data Processing Services in the Proposed Data Act, Centre on Regulation in Europe (Dec. 2022), 11, available at https://cerre.eu/wp-content/uploads/2022/12/Data_Act_Cloud_Switching.pdf.
[9] Bertin Martens, Geoffrey Parker, Georgios Petropoulos, & Marshall van Alstyne, Towards Efficient Information Sharing in Network Markets (Bruegel Working Paper No. 12, Nov. 10, 2021), https://www.bruegel.org/2021/11/towards-efficient-information-sharing-in-network-markets.
[10] On the various degrees of interoperability, see Jacques Cre?mer, Yves-Alexandre de Montjoye, & Heike Schweitzer, Competition Policy for the Digital Era, European Commission Directorate-General for Competition (2019), 58-59, https://op.europa.eu/en/publication-detail/-/publication/21dc175c-7b76-11e9-9f05-01aa75ed71a1/language-en.
[11] The Retail Banking Market Investigation Order 2017, UK Competition and Markets Authority (Feb. 2, 2017), https://www.gov.uk/government/publications/retail-banking-market-investigation-order-2017.
[12] See Oscar Borgogno & Giuseppe Colangelo, Consumer Inertia and Competition-Sensitive Data Governance: The Case of Open Banking, 9 EuCML 143 (2020).
[13] Impact Assessment Accompanying the Proposal for a Directive on Payment Service in the Internal Market, European Commission (Staff Working Document, 288 final, 2013), 137.
[14] Report on the Review of Directive 2015/2366/EU of the European Parliament and of the Council on Payment Services in the Internal Market, European Commission (COM(2023) 365 final), 4.
[15] See, e.g., Screen Scraping – Policy and Regulatory Implications, Australian Government – The Treasury (2023), https://treasury.gov.au/consultation/c2023-436961.
[16] For a literature review on the different modes of the standardization process, see Dize Dinçkol, Pinar Ozcan, & Markos Zachariadis, Regulatory Standards and Consequences for Industry Architecture: The Case of UK Open Banking, 52 Res. Policy 104760 (Jul. 2023).
[17] See, e.g., OECD, supra note 7, 32; Press Release, Final Report on the Sector Inquiry into Financial Technologies, Hellenic Competition Commission (Dec. 27, 2022), https://epant.gr/en/enimerosi/press-releases/item/2460-press-release-publication-of-the-final-report-of-the-fintech-sector-inquiry.html; Opinion on the Sector of New Technologies Applied to Payment Activities, French Competition Authority (Apr. 29, 2021), https://www.autoritedelaconcurrence.fr/en/opinion/sector-new-technologies-applied-payment-activities.
[18] See, e.g., Giulio Cornelli, Fiorella De Fiore, Leonardo Gambacorta, & Cristina Manea, Fintech vs Bank Credit: How Do They React to Monetary Policy?, 234 Econ. Lett. 111475 (Jan. 2024); Karen Croxson, Jon Frost, Leonardo Gambacorta, & Tommaso Valletti, Platform-Based Business Models and Financial Inclusion: Policy Trade-Offs and Approaches, 19 J. Compet. Law Econ. 75 (Mar. 2023); Claudio Borio, Stijn Claessens, & Nikola Tarashev, Entity-Based vs Activity-Based Regulation: A Framework and Applications to Traditional Financial Firms and Big Techs (FSI Occasional Paper No. 19, Aug. 3, 2022), https://www.bis.org/fsi/fsipapers19.htm; Johannes Ehrentraud, Jamie Lloyd Evans, Amelie Monteil, & Fernando Restoy, Big Tech Regulation: In Search of a New Framework (FSI Occasional Paper No. 20, Oct. 3, 2022), https://www.bis.org/fsi/fsipapers20.htm; Raihan Zamil & Aidan Lawson, Gatekeeping the Gatekeepers: When Big Techs and Fintechs Own Banks – Benefits, Risks and Policy Options (FSI Insights No. 39, Jan. 20, 2022), https://www.bis.org/fsi/publ/insights39.htm.
[19] See, e.g., Oskar Kowalewski & Pawel Pisany, The Rise of Fintech: A Cross-Country Perspective, 122 Technovation 102642 (Apr. 2023); Emma Li, Mike Qinghao Mao, Hong Feng Zhang, & Hao Zheng, Banks’ Investments in Fintech Ventures, 149 J. Bank. Financ. 106754 (Apr. 2023); Victor Murinde, Efthymios Rizopoulos, & Markos Zachariadis, The Impact of Fintech Revolution on the Future of Banking: Opportunities and Risks, 81 Int. Rev. Financ. Anal. 102103 (May 2022); Arnoud Boot, Peter Hoffmann, Luc Laeven, & Lev Ratnovski, Fintech: What’s Old, What’s New?, 53 J. Financ. Stab. 100836 (Apr. 2021); Luca Enriques & Wolf-Georg Ringe, Bank-Fintech Partnerships, Outsourcing Arrangements and the Case for a Mentorship Regime, 15 Cap. Mark. Law J. 374 (Jul. 31, 2020); Anjan V. Thakor, Fintech and Banking: What Do We Know?, 41 J. Financ. Intermed. 100833 (Jan. 2020); Aluma Zernik, The (Unfulfilled) Fintech Potential, 1 Notre Dame J. Emerging Tech 352 (Oct. 1, 2018); Rene? M. Stulz, FinTech, BigTech, and the Future of Banks, 31 J. Appl. Corp. Finance 86 (Sep. 2019); Xavier Vives, Digital Disruption in Banking, 11 Annu. Rev. Financ. Econ. 243 (Nov. 2019).
[20] For analysis of the debate on competitive opportunities and concerns coming from Big Tech’s entry into banking and financial markets, see Oscar Borgogno & Giuseppe Colangelo, The Data Sharing Paradox: BigTechs in Finance, 16 Eur. Compet. J. 492 (May 28, 2020).
[21] Miguel de la Mano & Jorge Padilla, Big Tech Banking, 14 J. Compet. Law Econ. 494, 503 (Dec. 4, 2018).
[22] Open Finance Policy Considerations (OECD Business and Finance Policy Papers, 2023), 30-31, https://doi.org/10.1787/19ef3608-en.
[23] See Dan Awrey & Joshua Macey, The Promise and Perils of Open Finance, 40 Yale J. on Reg. 1 (Feb. 28, 2022); Julian Alcazar & Fumiko Hayashi, Data Aggregators: The Connective Tissue for Open Banking, Fed. Res. Bank Kansas City (Aug. 24, 2022), https://www.kansascityfed.org/research/payments-system-research-briefings/data-aggregators-the-connective-tissue-for-open-banking.
[24] Account-information services and payment-initiation services are those that allow a payment-service provider access to a payment-service user’s data data where the provider neither holds the user’s account funds nor does it directly service his or her payment account. Account-information services allow for the aggregation in a single location of user data held by multiple account-servicing payment-service providers; payment-initiation services allow a payment to be initiated from a user’s account in a way that is convenient for both user and payee and without need for a payment instrument, such as a payment card.
[25] Directive 2015/2366 on Payment Services in the Internal Market, (2015) OJ L 337/35, Articles 64-68. For analysis of the XS2A rule, see Oscar Borgogno & Giuseppe Colangelo, Data, Innovation and Competition in Finance: The Case of the Access to Account Rule, 31 Eur. Bus. Law Rev. 573 (Apr. 15, 2019).
[26] European Commission, supra note 14, 4.
[27] Id., 3.
[28] Id.
[29] Id., 4.
[30] European Commission, supra note 13, 16.
[31] Id., 13-14.
[32] Id., 120.
[33] Id., 15.
[34] Id.
[35] Id.
[36] The legislative amendments to PSD2 are set out in two proposals that would separate the rules governing payment services’ conduct from rules on authorization and supervision of payment institutions. On the former, see, Proposal for a Regulation on Payment Services in the Internal Market and Amending Regulation (EU) No 1093/2010, European Commission, COM(2023) 367 final; on the latter, see, Proposal for a Directive on Payment Services and Electronic Money Services in the Internal Market Amending Directive 98/26/EC and Repealing Directives 2015/2366/EU and 2009/110/EC, European Commission, COM(2023) 366 final.
[37] European Commission, supra note 14, 4-5. See also European Commission, supra note 13, 42-43, stating that “[r]equiring a new standard would render the work done on all existing standards wasted. More fundamentally, imposing a single standard would mean abandoning the principle of technology neutrality and could risk being inflexible, not future-proof and hinder innovation, since new better standards for interfaces may arise in future.”
[38] European Commission, supra note 14, 4-5, reporting that the Berlin Group standard claims to account for 80% of the PSD2 APIs.
[39] Id.
[40] European Commission, Proposal for a Regulation on Payment Services, supra note 36, Recital 61.
[41] Id., Recital 57. Exemptions are allowed for cases of failure/unavailability of the dedicated interfaces and small ASPSPs for which a dedicated interface would be disproportionately burdensome (Recital 62).
[42] Id., Recital 59.
[43] Id., Recital 56.
[44] In a similar vein, see, Principles for Commercial Frameworks for Premium APIs, UK Joint Regulatory Oversight Committee (2023), available at https://www.fca.org.uk/publication/corporate/jroc-principles-commercial-frameworks-premium-apis.pdf.
[45] European Commission, Proposal for a Regulation on Payment Services, supra note 36, Recital 65.
[46] Proposal for a Regulation on a Framework for Financial Data Access and Amending Regulations (EU) No 1093/2010, (EU) No 1094/2010, (EU) No 1095/2010 and (EU) 2022/2554, European Commission, COM(2023) 360 final. In particular, the access provision would apply to the following selected categories of customer data: mortgage-credit agreements, loans, and accounts; savings, investments in financial instruments, insurance-based investment products, crypto-assets, real estate, and other related financial assets, as well as the economic benefits derived from such assets; pension rights in occupational-pension schemes; pension rights on the provision of pan-European personal-pension products; non-life insurance products; data which forms part of a firm’s creditworthiness assessment and that is collected as part of a loan-application process or a request for a credit rating.
[47] Id., Recital 2.
[48] Id., Recital 6.
[49] Id.
[50] Regulation (EU) 2022/1925 on Contestable and Fair Markets in the Digital Sector and Amending Directives (EU) 2019/1937 and (EU) 2020/1828 (Digital Markets Act), (2022) OJ L 265/1.
[51] Impact Assessment Report accompanying the Proposal for a Regulation on a Framework for Financial Data Access, European Commission, SWD(2023) 224 final, 113.
[52] European Commission, supra note 46, Recital 31.
[53] Report on Open Finance, Expert Group on European Financial Data Space (2022), 35, https://finance.ec.europa.eu/publications/report-open-finance_en.
[54] European Commission, supra note 46, Recital 49.
[55] Id., Recital 21.
[56] Id., Recitals 7 and 29. See also European Commission, supra note 51, 21; Expert Group on European Financial Data Space, supra note 53, 11.
[57] Regulation (EU) 2023/2854 on Harmonized Rules on Fair Access to and Use of Data and Amending Regulation (EU) 2017/2394 and Directive (EU) 2020/1828 (Data Act), (2023) OJ L1, Article 9.
[58] European Commission, supra note 46, Articles 5, 9-11.
[59] European Commission, supra note 56, 19.
[60] European Commission, supra note 46, Articles 9 and 10, Recital 25.
[61] European Commission, supra note 56, 55.
[62] European Commission, Proposal for a Regulation on Payment Services, supra note 36, Recital 55; European Commission, supra note 13, 47.
[63] UK Competition and Markets Authority, supra note 11. For further analysis, see Dinçkol, Ozcan, & Zachariadis, supra note 16; Borgogno & Colangelo, supra note 12.
[64] Retail Banking Market Investigation – Final Report, UK Competition and Markets Authority (2016), https://www.gov.uk/cma-cases/review-of-banking-for-small-and-medium-sized-businesses-smes-in-the-uk#final-report.
[65] Id., §46.
[66] Id., §54.
[67] Id., §65.
[68] Id., §66.
[69] Recommendations for the Next Phase of Open Banking in the UK, UK Joint Regulatory Oversight Committee (2023), available at https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1150988/JROC_report_recommendations_and_actions_paper_April_2023.pdf; Joint Statement by HM Treasury, the CMA, the FCA and the PSR on the Future of Open Banking, UK Government (2022), https://www.gov.uk/government/publications/joint-statement-by-hm-treasury-the-cma-the-fca-and-the-psr-on-the-future-of-open-banking.
[70] European Commission, supra note 13, 195-196.
[71] UK Government, supra note 69. See also, Open Finance – Feedback Statement, Financial Conduct Authority (2021), available at https://www.fca.org.uk/publication/feedback/fs21-7.pdf.
[72] Competition and Consumer (Consumer Data Right) Rules 2020.
[73] White House, supra note 1.
[74] Consumer Financial Protection Bureau, supra note 2.
[75] Id., §§1033.111 and 1033.211.
[76] Id., §1033.311(c)(1).
[77] Id., §1033.301(c) and §1033.311(c)(2).
[78] Id., 21.
[79] Id., arguing that “[c]omprehensive and detailed technical standards mandated by Federal regulation could not address the full range of technical issues in the open banking system in a manner that keeps pace with changes in the market and technology. A rule with very granular coding and data requirements risks becoming obsolete almost immediately, which means the CFPB and regulated entities would experience constant regulatory amendment, or worse, the rule would lock in 2023 technology, and associated business practices, potentially for decades. In developing the proposal, the CFPB is mindful of these limitations and the risk that they may adversely impact the development and efficient evolution of technical standards over time.”
[80] Id., §§1033.131 and §1033.141.
[81] Awrey & Macey, supra note 23, 20. See also He, Huang, & Zhou, supra note 6, noting that open banking’s core principles do not stop at customer ownership of their own data.
[82] Rohit Chopra, Remarks at Money 20/20 (Oct. 25, 2022), https://www.consumerfinance.gov/about-us/newsroom/director-chopra-prepared-remarks-at-money-20-20.
[83] Press Release, CFPB Proposes Rule to Jumpstart Competition and Accelerate Shift to Open Banking, U.S. Consumer Financial Protection Bureau (Oct. 19, 2023), https://www.consumerfinance.gov/about-us/newsroom/cfpb-proposes-rule-to-jumpstart-competition-and-accelerate-shift-to-open-banking.
[84] Consumer Financial Protection Bureau, supra note 2, 7.
[85] Id., 185 and 213.
[86] Id., 187.
[87] Id., 185-186. Notably, the CFPB estimates that there were between 50 billion and 100 billion total consumer-authorized access attempts in 2022.
[88] See Awrey & Macey, supra note 23, 19 and 35-37, arguing that the U “is home to the world’s largest, most fragmented, and most diverse financial services industry.”
[89] About FDX – Our Mission, Financial Data Exchange, https://financialdataexchange.org/FDX/FDX/About/About-FDX.aspx?hkey=dffb9a93-fc7d-4f65-840c-f2cfbe7fe8a6 (last accessed Jun. 9, 2024).
[90] Consumer Financial Protection Bureau, supra note 2, 9.
[91] Awrey & Macey, supra note 23, 37. See also Consumer Financial Protection Bureau, supra note 2, 16.
[92] Consumer Financial Protection Bureau, supra note 2, 14-15.
[93] European Commission, supra note 46, Recital 7.
[94] European Commission, supra note 13, 14.
[95] Id., 191. See also, A Study on the Application and Impact of Directive (EU) 2015/2366 on Payment Services (PSD2), VVA & CEPS (2023), https://op.europa.eu/en/publication-detail/-/publication/f6f80336-a3aa-11ed-b508-01aa75ed71a1/language-en, estimating that TPPs spent €35 million on problems linked to accessing APIs and €140 million on maintaining legacy systems due to APIs not working properly.
[96] See VVA & CEPS, supra note 95, estimating €2.2 billion in total (one-off) costs for all ASPSPs for setting up of PSD2 APIs.
[97] European Commission, supra note 36, Recital 56; European Commission, supra note 56, Recital 29.
[98] Data Act, supra note 57, Recitals 46 and 47, and Article 9.
[99] Consumer Financial Protection Bureau, supra note 2, §1033.301(c).
[100] See, Review into Open Banking: Giving Customers Choice, Convenience and Confidence, Australian Government (2018), 44, https://treasury.gov.au/consultation/c2018-t247313, acknowledging that determining equivalent data for data recipients whose primary business is not financial services can be complex, and therefore recommending that, as part of the accreditation process for non-bank data recipients, the competition regulator should determine what constitutes equivalent data for the purposes of participating in open banking.
[101] Consumer Financial Protection Bureau, supra note 2, §1033.421(a)(2).
[102] Giuseppe Colangelo & Mariateresa Maggiolino, From Fragile to Smart Consumers: Shifting Paradigm for the Digital Era, 35 Comput. Law Secur. Rev. 173 (Apr. 2019).
[103] Consumer Financial Protection Bureau, supra note 2, 21. See also Rohit Chopra, Remarks at the Financial Data Exchange Global Summit, U.S. Consumer Financial Protection Bureau (Mar. 13, 2024), https://www.consumerfinance.gov/about-us/newsroom/prepared-remarks-of-cfpb-director-rohit-chopra-at-the-financial-data-exchange-global-summit, acknowledging that the EU approach led to fragmented or conflicting standards, which created complications for open-banking implementation and undermined interoperability, but simultaneously arguing that the opposite approach promoted in other jurisdictions to prescribe detailed technical standards for data sharing would not work in the United States.
[104] Consumer Financial Protection Bureau, supra note 2, §1033.131 and 1033.141. But see also Chopra, supra note 103, announcing that, before finalizing the Personal Financial Data Rights rule, the CFPB would “codify” what attributes standard-setting organizations must demonstrate to be recognized under the rule.
[105] Consumer Financial Protection Bureau, supra note 2, 22.
[106] Babina et al., supra note 4; OECD, supra note 7.
ICLE Issue Brief Executive Summary Payment networks connect buyers with sellers. Success hinges on attracting sufficient participation on both sides of the market. Card issuers offer rewards, insurance, . . .
Payment networks connect buyers with sellers. Success hinges on attracting sufficient participation on both sides of the market. Card issuers offer rewards, insurance, fraud prevention, and other benefits that create incentives for use. Issuers can do so, in part, because they receive an “interchange” fee from acquiring banks, who in turn charge a fee to merchants (the “merchant discount rate” or MDR).
Price controls on these fees interfere with the delicate balance of the two-sided market ecosystem. Interchange-fee caps in various jurisdictions have led banks to increase other fees (such as monthly account fees and annual card fees), reduce card benefits, and adjust product offerings. As a result, consumers—especially those with lower incomes—face higher costs and reduced access to financial services. These costs generally exceed by a wide margin any consumer savings from reduced prices. Price controls on MDR, seen recently in India and Costa Rica, have also distorted the market by impeding competition and favoring larger players (big-box merchants and internet-platform-service providers, which are able to monetize in other ways), while harming smaller entities and traditional banks.
Instead of imposing price controls, governments should reduce regulatory barriers and provide core public goods, such as courts of law and identity registers, which enable competition, market-driven innovation, and financial inclusion.
Payment networks are integral to modern economies, facilitating the seamless exchange of goods and services across vast distances and among unfamiliar parties. This issue brief considers the effects of regulatory interventions on such networks, looking in particular at price controls on interchange fees and merchant discount rates (MDRs). While intended to reduce costs for merchants and consumers, the evidence shows these price controls impede competition and harm consumers.
For a payment network to be self-sustaining, there must be sufficient participation on both sides of the market—i.e., by both buyers and sellers. If too few sellers accept a particular form of payment, buyers will have little reason to adopt it. Likewise, if too few buyers hold a particular form of payment, sellers will have little reason to accept it. At the same time, payment networks must cover their costs of operation, including credit risk, monitoring costs, fraud risk, and investments in innovation. Payment networks typically address these two problems (optimizing participation and covering costs) simultaneously through various fees and incentives, thereby maximizing value to all participants.
Maximizing value often entails that one side of the market (usually, the merchants) subsidizes the other side (consumers) through an “interchange fee” received by the issuing bank from the acquiring bank. The interchange fee covers a much wider range of costs than the operational costs mentioned above. Specifically, it typically includes issuer costs associated with collection and default, as well as many of the additional benefits that cardholders typically receive, including various kinds of insurance and such rewards as cashback rewards and airline miles. The interchange fee, in turn, is typically covered by fees charged by the merchant’s acquiring bank (see Figure 1), known as the merchant discount rate (MDR) or merchant service charge (MSC).
Caps on interchange fees and/or MDR are price controls, which have the effect of reducing the incentive to supply the product subject to that control. Many countries have introduced price controls on interchange fees, and these have been much-studied. Section II presents a summary of the evidence of the effects of price controls on interchange fees.
By contrast, relatively few countries have imposed price controls on MDR and the effects of such price controls have rarely been scrutinized.[1] Section III thus offers an initial assessment of such effects. Finally, Section IV offers conclusions and policy recommendations.
This section considers the effects of price controls on interchange fees. While more than 30 jurisdictions have imposed such price controls, we focus on the jurisdictions for which we have the best evidence.[2] While each jurisdiction and each price control is unique, the effects appear to generalize readily. Therefore, the limited selection of jurisdictions here should be seen as typical examples.
This section begins with a brief description of the specific form price controls took in each jurisdiction. That is followed by a description of the response by (issuing) banks. Finally, the effects on consumers are evaluated.
Various jurisdictions have taken a variety of approaches to the imposition of price controls on interchange fees. The following are examples of some of the better-studied interventions.[3] These examples show what happens in the period immediately following the introduction of interchange-fee price controls. While some price controls have been repealed or changed, their effects are most transparent in the immediate aftermath of their implementation, and the inclusion of these examples thus remains instructive.
Spain imposed caps on interchange fees for both credit and debit cards through agreements with merchant associations and card schemes in two distinct phases: the first ran from 1999 to 2003, the second from 2006 to 2010.[4] During the first phase, caps were initially set at 3.5%, falling to 2.75% in July 2002. Caps were much lower during the second phase and were lower for large banks (over €500 million), whose credit-card interchange fees were capped at 0.66% in 2006, falling to 0.45% by 2010, than for small banks (under €100 million), whose credit-card interchange fees were capped at 1.4% in 2006, falling to 0.79% in 2010.
The Reserve Bank of Australia (RBA) introduced caps on interchange fees for credit cards in 2003 under a “cost-based framework,” which adjusted interchange fees based on processing costs. As a result, the RBA aimed in the first instance to reduce interchange fees by 40%, from an average of 0.95% in 2002 to 0.6% in 2003.[5]
Under a provision of the Dodd-Frank Wall Street Reform Act of 2010 known commonly as the “Durbin amendment,” the U.S. Federal Reserve imposed caps on debit-card interchange fees for large banks, as well as routing requirements for all debit-card issuers.[6] As a result, debit-card-interchange fees fell by about 50% for large banks almost immediately. Interchange fees on debit cards issued by smaller banks and credit unions initially fell by a smaller amount, and interchange fees on single-message (PIN) debit cards have now fallen to similar levels as PIN debit cards issued by larger banks.[7]
In 2015, the EU capped fees at 0.2% for debit cards and 0.3% for credit cards.[8] These are hard caps with few exceptions, and those rates rapidly became the norm for most transactions (with the exception of some domestic schemes that offer lower rates).[9]
Faced with potentially large losses of revenue, banks adopted numerous strategies to limit their losses, including, most notably:
Banks commonly increased other fees, including annual-card fees, account-maintenance fees, late fees, and interest on loans and credit cards. For example, in the United States, banks raised monthly account-maintenance fees and increased the minimum balance needed for a fee-free account.[10] In the EU, banks increased other fees and interest rates.[11]
Banks reduced the rewards and benefits associated with those cards that were subject to price controls. This included reducing or eliminating cashback rewards, points, and other incentives that were previously funded, in part, by interchange fees. For example, U.S. banks subject to the Durbin amendment generally eliminated debit-card rewards. In Australia, meanwhile, the average value of rewards fell by about 30%.[12]
Some banks shifted their focus to products not affected by the caps. In the United States, where the Durbin amendment applied only to debit cards, banks shifted their promotional efforts toward credit cards. In Australia, banks issued “companion” cards on three-party networks that were initially exempt. In some EU jurisdictions, banks have promoted business credit cards, which are exempt.[13]
Interchange-fee caps make the vast majority of consumers worse off, especially those with lower incomes. This outcome primarily arises from several interconnected factors:
As noted, in response to the reduction in interchange fees, banks have increased a range of fees, including higher account-maintenance charges (and higher minimum-balance requirements to qualify for free accounts); larger overdraft fees; increased interest rates on loans and credit cards; and higher annual fees on credit cards. These increased fees have disproportionately affected lower-income consumers, who may struggle more to maintain minimum-balance requirements or avoid overdrafts.[14]
The reductions in rewards and other benefits on cards subject to interchange-fee caps amount to a direct pecuniary loss for millions of consumers. Often, these losses far exceed the reduction in interchange fees that cause them. A case in point is insurance: credit-card-issuing banks are typically able to negotiate volume-based discounts on insurance, which means they pay less than would an individual seeking his or her own policy. But if there simply is not sufficient revenue to cover the continuation of such benefits, issuers are forced to withdraw it, as many issuers in the EU have done.
Larger account fees and increased minimum-balance requirements have resulted in an increase in unbanked and underbanked households in the United States, particularly among lower-income consumers.[15] As a result, more households have become reliant on check-cashing services, payday loans, and other high-cost financial services.
While larger merchants save on transaction fees, due to the lower interchange fees, these savings are not fully passed on to consumers in the form of lower prices. The degree of pass-through can vary greatly, depending on the competitive dynamics of various retail sectors. But in most cases, merchants have passed through the reduced costs associated with lower interchange fees at a lower rate than banks have passed through losses in fee revenue, in the form of higher-priced accounts, cards and services, and reductions in rewards. As such, consumers are, on net, worse off.[16]
While the intended goal of interchange-fee caps may be to reduce merchants’ costs and generate savings for consumers, in practice, consumers see few, if any, retail-price reductions, even as they experience significantly reduced benefits from their payment cards, as well as increased banking costs.
This section explores the effects of caps on merchant discount rates. As noted earlier, it is difficult to draw broad conclusions of the kind we were able to draw in Section II on the effects of interchange-fee caps. This is both because of the relative rarity of MDR caps, as well as the fact that they have—in the two cases examined here—coincided with other policy changes and broader economic and social phenomena that simultaneously have had significant effects on the payments system. The two case studies nonetheless offer salutary lessons about the problems inherent in imposing price controls on payment fees.
India’s MDR caps, which date back to 2012, were put in place as part of a series of interventions whose broad objective was to increase access to finance and shift transactions from paper to electronic money. These initiatives included (in order of implementation): a digital ID (launched in 2010); a domestic-card scheme and debit card (RuPay) with MDR caps (implemented in 2012); and a domestic faster-payments system (UPI, launched in 2016) with zero MDR for most transactions. This section focuses primarily on the implementation of UPI, its MDR caps, and the implications for consumers, merchants, and payment-service providers.
Until 2015, the two largest companies offering mobile phone-based payment services in India were Paytm and MobiKwik, which both relied on MDR to facilitate their expansion. MDR enabled these services to offer consumers cashback rewards and other incentives. MobiKwik signed up 1.5 million merchants and 55 million registered users by 2015,[17] while Paytm had 100 million registered accounts in 2015.[18]
Payment services are the core of Paytm’s business, contributing 58% of its revenue in Q3 2023 (although it fell slightly in Q1 2024).[19] These services arise from users making payments from mobile wallets stored on Paytm’s platform, using debit cards and credit cards. The company charges merchants an MDR that ranges from 0.4% to 2.99% of the transaction amount, depending on the payment type (for small-to-medium-size businesses).[20] MobiKwik, meanwhile, generates revenue from commissions and advertisements from its Zaak payment-gateway franchise subsidiary,[21] as well as loans—including short-term credit, buy-now-pay-later, and personal loans—and investment advice.[22] Of note, Zaak is also highly reliant on MDR as a source of revenue.[23]
In 2016, the National Payments Corporation of India (NPCI), a public-private partnership between the Reserve Bank of India (RBI) and the Indian Banks Association (IBA), launched the Unified Payment Interface (UPI), an open-source interoperable API that facilitates real-time transfers between individuals with accounts at participating banks that have integrated the API into their smartphone apps.[24] NPCI also built its own app, BHIM UPI, that is available directly and can also be white-labelled by banks and PSPs.[25]
By any measure, UPI has been enormously successful. In April 2024, more than 80% of all retail payments by volume and about 30% by value were made using UPI.[26]
PhonePe, which launched in 2016, and Google Pay, which launched in India in 2017, have from the outset operated exclusively on UPI. PhonePe launched as a wholly owned subsidiary of Flipkart, India’s largest online marketplace. This enabled it to leverage the marketplace’s then-100 million users, as well as subsequent growth of Flipkart’s user base.[27] Although PhonePe has now separated from Flipkart, it is still owned by Walmart, which bought Flipkart in 2018, and is thus able to leverage the retail giant’s merchant ecosystem.
Google, meanwhile, was able to leverage its brand recognition and to monetize Google Pay through a combination of advertising and its local online marketplace. It is noteworthy that, in a 2023 survey, Google was ranked the top brand in India, followed by Amazon and YouTube (which is owned by Google).[28]
PhonePe is now the largest payment network in India, with approximately 200 million active users; Paytm ranks second, with approximately 100 million active users;[29] Google Pay is third, with about 67 million active users;[30] and MobiKwik is fourth, with 35 million active monthly users in 2023.[31]
In April 2024, PhonePe and Google Pay together represented 87% of UPI transactions by volume and value (Table 1). Paytm was the third-largest payment app on UPI, representing 8% of transactions and 6% of value. The fourth-largest app was CRED, which is a members-only app aimed at individuals with higher credit scores.[32] Together, these top four apps represented 96.5% of transaction volume and 95.5% of transaction value. The remaining apps combined all had less than 5% market share between them, and none had more than 1% individually.[33]
SOURCE: NPCI
Since UPI transactions represented about 80% of India’s retail volume, this means that the combination of Google Pay and PhonePe represented more than 70% of all non-cash retail transactions in India by volume.
The reason such as high proportion of UPI payments come from the top four apps is that their operators have been able to monetize transactions and encourage adoption on both sides of the market without relying on MDR. NPCI prohibits MDR for most applications (exceptions are pre-paid debit and rechargeable mobile wallets, which since April 2023 have been permitted to charge up to 1.1% in MDR).[34]
These MDR caps on UPI have, however, made it less economically viable for payment-services providers (PSPs) to offer such incentives for consumers. Indeed, Paytm has recently switched from offering cashback rewards to consumers to offering cashback rewards to merchants—presumably because it realizes it has to compete with other payments ecosystems that run on UPI and therefore charge zero MDR.[35]
Like the interchange-fee caps explored in Section II, MDR caps change the economics of payment systems by reducing the ability of card issuers and payment-app operators to balance the two sides of the market through cross-subsidies. These effects became most visible after UPI went live in 2016 with zero MDR.
As noted, both PhonePe and Google Pay were able to leverage existing networks to attract both merchants and users (Flipkart, in the case of PhonePe, and Google’s search engine and other products, in the case of Google Pay). Having built a significant base of participants on both sides of the market, the companies have been able to monetize their payment systems through product advertising, upselling of related products, and in-app transactions, thereby reinforcing the network effects.
While MDR is prohibited on UPI, PhonePe usually charges a 2% transaction fee for its online-payment gateway service. Acting as a payment gateway carries little counterparty or credit risk, and is typically offered in other jurisdictions for a small flat fee. The 2% charged by PhonePe therefore effectively goes straight to the bottom line, or can be used to cross-subsidize participation, thereby further enhancing the PSPs’ market share. Indeed, in July 2023, PhonePe began offering its payment gateway for free to new customers (an own-side subsidy: existing users subsidize new users).[36]
Google Pay, meanwhile, has offered cashback incentives for use of the service on apps within its own (Android) ecosystem.[37] This encourages the use of Google Pay in much the same way that traditional rewards offer incentives to use other payment systems. The merchant beneficiaries are, however, limited to participants in its app system, for which Google charges a 30% transaction fee.
While Paytm’s share of UPI is low compared to PhonePe and Google Pay, it can monetize such transactions both by providing add-on financial services, such as insurance and investments, as well as through the MDR it charges on non-UPI transactions.[38] Paytm has also built a rewards program for merchants that encourages participation in its marketplace.[39]
Finally, CRED has partnered with a range of high-end brands to undertake targeted advertising, the revenue from which enables CRED to offer rewards to users of various kinds, including cashback rewards.[40]
While UPI has likely contributed to increased financial inclusion, the prohibition on MDR for most types of transactions has distorted the entire market toward merchants affiliated with the large mobile-payment ecosystems (PhonePe, Google, and Paytm) and a payment network targeted at higher-income customers (CRED). Meanwhile, this has come at a huge price for the majority of banks and other PSPs that facilitate payments on UPI. The Payments Council of India estimates that its members lose 55 billion rupees (US$660 million) annually as a result of the zero MDR on UPI and RuPay transactions.[41] This is effectively a transfer from those banks to the companies whose apps monetize UPI transactions.
India’s government partly offsets this loss through a subsidy to UPI participants of between 15 and 25 billion rupees.[42] But this amounts to a subsidy to PhonePe, Google, Paytm, and CRED, which is odd. Moreover, experience with other systems that impose restrictions on payment-transaction fees suggests that banks will seek to recover these losses via other fees.[43] To the extent that such additional fees fall on lower-income account holders, the effect on financial inclusion is likely to be negative.
India’s government has also announced that it intends to cap the share of UPI transactions for any one service provider to 30% by the end of 2024, with the goal of reducing the dominance of Google Pay and PhonePe.[44] It remains unclear how such caps will be implemented, but it is almost certain that whatever mechanism is adopted would cause other harmful effects. Indeed, there is something slightly absurd about introducing a cap on participation in order to address the perverse consequences of caps on MDR.
Given that the MDR caps are the cause of Google Pay and PhonePe’s combined dominance, a far better solution would be to lift those caps. Indeed, based on the evidence adduced here, removing the MDR caps would likely unleash competition and innovation. Instead of being dominated by a few giant players, UPI would become what its visionaries intended: an inclusive platform that facilitates participation by a wide range of players. The platform could then further expand access to payments, enhance smaller merchants’ ability to compete, and improve financial inclusion.
Costa Rica introduced price controls on payment cards in 2020. Legislative Decree No. 9831 authorized the Central Bank of Costa Rice (BCCR) to regulate fees charged by service providers on “the processing of transactions that use payment devices and the operation of the card system.”[45] The legislation’s stated objective was “to promote its efficiency and security, and guarantee the lowest possible cost for affiliates.” BCCR was tasked with issuing regulations that would ensure the rule is “in the public interest” and guarantee that fees charged to “affiliates” (i.e., merchants) are “the lowest possible … following international best practices.”
Starting Nov. 24, 2020, BCCR set maximum interchange fees for domestic cards at 2.00% and maximum MDR at 2.50%. Over a four-year period, BCCR has gradually ratcheted down both MDR and interchange-fee caps, as shown in Table 2.
An unusual feature of BCCR’s regulation is the simultaneous cap on both MDR and interchange fees, which has the effect of limiting revenue to both acquiring banks and issuing banks. This has likely reduced investments by issuers and acquirers and led to lower levels of system efficiency and speed, and possibly to increased fraud.
It is also worth noting that both interchange fees and MDR vary according to merchant type and location, in large part because the risk of fraud varies among different types of merchants. There is a danger, therefore, that imposing price controls on both MDR and interchange fees could make it unprofitable for acquirers to process payments for some riskier merchants. In other words, in its attempt to reduce merchant costs, BCCR may inadvertently (but predictably) prohibit some merchants from being able to accept payment cards. This is neither efficient, nor is it in the public interest.
Looking at the trajectory of the mean and median MDRs for various merchant categories in Costa Rica before price controls were imposed (as shown in Figures 1 and 2), MDRs were, on average, quite high (a mean of about 4%) but the medians were even higher (ranging from 4% to 10% for all categories except gas stations and passenger transportation). This significant difference between the mean and median MDRs suggests either that a large proportion of merchants represented a particularly high risk (e.g., from fraud and/or chargebacks) or that there was a lack of competition among acquiring banks (and perhaps even collusion)—or perhaps both.
SOURCE: Author’s calculations based on data from BCCR
If the previously high MDRs were a function of merchant-associated risk, capping MDRs would be expected to cause acquiring banks to drop some merchants. The data, however, show that the number of merchants increased from 2020 to 2022, which suggests that lack of competition among acquirers is a more likely explanation.[46]
To the extent that these high MDRs reflect a lack of competition among acquiring banks, the appropriate response would have been to seek to understand what was causing this lack of competition and then to remedy that directly. For example, if the lack of competition arose from regulations imposed by BCCR, it would be incumbent on BCCR to modify its regulations to reduce barriers to competition. Capping MDR does not address the underlying problem; indeed, it likely makes it worse, by inhibiting acquirers from being able to differentiate themselves on price or quality.
In competitive markets without price controls, prices evolve in ways that tend to maximize value for all participants. In payment networks, interchange fees play an important role, enabling issuers to develop appealing and competitive products with features that range from cashback rewards to travel insurance. This encourages customers to use the card or app in question, which, in turn, benefits merchants who see greater sales. The fees also facilitate associated innovations, such as AI-based fraud detection, contactless payments, and online token vaults.
When governments impose price controls on payment fees—whether in the form of caps on interchange fees or on MDR, or both—bank revenue from card transactions falls. Issuers (and acquirers, in the case of MDR caps) respond by increasing other fees, reducing card benefits, and reducing investments in improvements. The ecosystem becomes distorted, unbalanced, and fundamentally less competitive.
The beneficiaries of such interventions tend to be larger merchants and other participants in the system (including larger financial technology, or “fintech,” players). These players can leverage and reinforce their loyal customer base, and often charge fees for services (such as payment gateways) that are as high or higher than interchange fees, and even MDR.
India’s government recognizes the anticompetitive nature of its MDR caps, but appears to think that this is best-addressed by introducing new caps on participation. Costa Rica, meanwhile, appears to have suffered from a lack of competition among merchant acquirers, which drove up the cost of MDR—leading it to introduce caps on MDR.
But, in both cases, regulation is the problem, not the solution. In India’s case, various regulations—especially the caps on MDR for UPI transactions, as well as the government subsidies to UPI—have resulted in heavy concentration and impeded competition from fintech startups. Meanwhile, in Costa Rica, existing regulatory barriers likely impeded competition in the acquisition market, which enabled acquirers to charge excessive rates. This has prompted BCCR to impose MDR and interchange-fee caps that, in turn, have impeded competition in issuance.
The biggest losers from such interventions tend to be lower-income consumers, who end up paying higher bank fees and leaving—or not entering—the banking system. But there are many other losers, including the majority of consumers, and the many potential competitors that are excluded from participation because they are unable to monetize their investments via interchange and/or MDR fees.
Governments should not distort markets in these ways. Quite the opposite: they should be as neutral as possible. Rather than imposing price controls on payment systems, they might look to review and repeal existing government-created barriers to financial inclusion. These could include licensing requirements for banks that limit competition and enable acquirers to charge abnormal MDR rates.
In other words, rather than layer additional distorting regulations atop existing regulations, further harming the operation of complex private-market ecosystems, they should look for ways to reduce government-imposed barriers to competition. And, generally, they should limit themselves to the production of genuine public goods, such as courts and identity registers. Doing so will enable greater participation, competition, and innovation, which will drive financial inclusion.
[1] Other jurisdictions, such as Denmark and China, also have imposed restrictions on MDR/MSC, but this author was unable to adduce sufficient information about the nature and effects of these interventions to develop substantive analyses.
[2] We draw extensively on our earlier review: Julian Morris, Todd J. Zywicki, & Geoffrey A. Manne, The Effects of Price Controls on Payment-Card Interchange Fees: A Review and Update, (ICLE White Paper 2022-03-04 & George Mason L. & Econ. Research Paper No. 22-07, 2022), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4063914. See also Fumiko Hayashi & Jesse Leigh Maniff, Public Authority Involvement in Payment Card Markets: Various Countries, August 2020 Update, Fed. Res. Bank of Kan. City (August 2020), available at https://www.kansascityfed.org/documents/6660/PublicAuthorityInvolvementPaymentCardMarkets_VariousCountries_August2020Update.pdf.
[3] Morris et al., supra note 2.
[4] Juan Iranzo, Pascual Fernández, Gustavo Matías, & Manuel Delgado, The Effects of the Mandatory Decrease of Interchange Fees in Spain (Munich Personal RePEc Archive, MPRA Working Paper No. 43097, 2012), available at https://mpra.ub.unimuenchen.de/43097/1/MPRA_%20paper_43097.pdf.
[5] Press Release, Reform of Credit Card Schemes in Australia, Res. Bank of Austl. (Aug. 27, 2002), https://www.rba.gov.au/media-releases/2002/mr-02-15.html.
[6] H.R.4173 – Dodd-Frank Wall Street Reform and Consumer Protection Act, s.1075(a)(3); Debit Card Interchange Fees and Routing; Final Rule, 76 Fed. Reg. 43,393-43,475, (Jul. 20, 2011).
[7] Todd J. Zywicki, Geoffrey A. Manne, & Julian Morris, Unreasonable and Disproportionate: How the Durbin Amendment Harms Poorer Americans and Small Businesses, Int’l Cntr For L. & Econ. (Apr. 25, 2017), available at https://laweconcenter.org/wp-content/uploads/2017/08/icle-durbin_update_2017_final-1.pdf.
[8] Regulation (EU) 2015/751 of the European Parliament and of the Council of 29 April 2015 on Interchange Fees for Card-Based Payment Transactions, 2015, O.J. (L 123) 1, 10-11 (hereinafter “IFR”).
[9] Ferdinand Pavel et al., Study on the Application of the Interchange Fee Regulation: Final Report 89, European Commission Directorate-General for Competition (2020), https://op.europa.eu/s/zKl2.
[10] Mark D. Manuszak & Krzysztof Wozniak, The Impact of Price Controls in Two-Sided Markets: Evidence From US Debit Card Interchange Fee Regulation (Bd. of Governors of the Fed. Res. Sys. Fin. & Econ. Discussion Series, Working Paper No. 2017-074, 2017); Vladimir Mukharlyamov & Natasha Sarin, Price Regulation in Two-Sided Markets: Empirical Evidence From Debit Cards (SSRN Working Paper, 2019), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3328579.
[11] Interchange Fee Regulation (IFR) Impact Study Report, Edgar Dunn & Co. (Jan. 21, 2020), https://www.edgardunn.com/reports/interchange-fee-regulation-ifr-impact-assessment-study-report.
[12] Iris Chan, Sophia Chong, & Stephen Mitchell, The Personal Credit Card Market in Australia: Pricing Over the Past Decade, Res. Bank Of Austl. Bull. (2012), available at https://www.rba.gov.au/publications/bulletin/2012/mar/pdf/bu-0312-7.pdf.
[13] IFR, supra note 8, Art. 1(3)(a).
[14] Mukharlyamov & Sarin, supra note 10.
[15] Id.
[16] Iranzo et al., supra note 4 at 34-37; Ian Lee, Geoffrey A. Manne, Julian Morris, & Todd J. Zywicki, Credit Where It’s Due: How Payment Cards Benefit Canadian Merchants and Consumers, and How Regulation Can Harm Them, Macdonald-Laurier Institute 1, 27 (2013); Morris, Zywicki, & Manne, supra note 7 at 23-29.
[17] Shabana Hussain, MobiKwik’s Journey and the Path Ahead, Forbes India (Apr. 6, 2015), http://forbesindia.com/article/work-in-progress/mobikwiks-journey-and-the-path-ahead/39905/1 .
[18] Paytm Reaches 100 Million Users, Business World (Aug. 11, 2015), https://businessworld.in/article/paytm-reaches-100-million-users–84698.
[19] Press Release, Paytm’s Earning’s Release for Quarter and Year Ending March 2024, Paytm (May 22, 2024), available at https://paytm.com/document/ir/financial-results/Paytm_Earnings-Release_INR_Q4_FY24.pdf.
[20] Paytm’s Pricing, Paytm, https://business.paytm.com/pricing (last visited Jun. 07, 2024).
[21] MobiKwik Consolidated Financial Statement, MobiKwik (2023), available at https://documents.mobikwik.com/files/investor-relations/statements/mobikwik/Consolidated-Financials-Sept2023.pdf; Report on the Audit of Special Purpose Interim Financial Statements, Tattvam & Co. (Dec. 31, 2023), available at https://documents.mobikwik.com/files/investor-relations/statements/zaakpay/zaakpay-financials-sept2023.pdf; Subsidiary Financials, MobiKwik, https://www.mobikwik.com/ir/subsidiary-financials (last visited Jun. 7, 2024); Status of Applications Received from Online Payment Aggregators (PAs) Under Payment and Settlement Systems Act, 2007, Res. Bank of India, https://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=4236 (last updated Jun. 1, 2024).
[22] Id., Res. Bank of India.
[23] Pratik Bhakta, MobiKwik to Add Muscle to Its Payment Gateway Business, The Economic Times (May 13, 2017), https://economictimes.indiatimes.com/small-biz/startups/mobikwik-shifting-focus-to-payment-gateway-space/articleshow/58655807.cms?from=mdr.
[24] Unified Payments Interface (UPI), National Payments Corporation of India (2024), https://www.npci.org.in/what-we-do/upi/product-overview; UPI Live Members, National Payments Corporation of India (2024), https://www.npci.org.in/what-we-do/upi/live-members.
[25] BHIM, https://www.bhimupi.org.in (last visited Jun. 7, 2024); Pratik Bhakta, BHIM to Be the Right Platform for Small Banks to Enter Payment Space, The Economic Times (Feb. 3, 2017), https://economictimes.indiatimes.com/small-biz/security-tech/technology/bhim-to-be-the-right-platform-for-small-banks-to-enter-payment-space/articleshow/56945820.cms?from=mdr.
[26] Payment System Indicators, Res. Bank of India (Apr. 2024), https://www.rbi.org.in/Scripts/PSIUserView.aspx?Id=35.
[27] Alnoor Peermohamed, Flipkart Grows User Base to 100 million, Business Standard (Jun. 6, 2024), https://www.business-standard.com/article/companies/flipkart-grows-user-base-to-100-million-116092100216_1.html.
[28] Gaurav Laghate, Google, Amazon, YouTube Top India brands, Livemint (Jun. 27, 2023), https://www.livemint.com/companies/news/google-amazon-youtube-top-india-brands-11687887362055.html.
[29] Paytm Surpasses 100 Million Monthly Transacting Users for the First Time in Q3 FY24, Livemint (Jan. 22, 2024), https://www.livemint.com/companies/news/paytm-surpasses-100-million-monthly-transacting-users-for-the-first-time-in-q3-fy24-11705932856486.html.
[30] Michael G. William, How Many People Use Google Pay in 2023?, Watcher Guru (Sep. 14, 2023), https://watcher.guru/news/how-many-people-use-google-pay-in-2023#google_vignette.
[31] MobiKwik Continues Profitable Streak for Second Quarter in a Row, The Economic Times (Oct. 05, 2023), https://economictimes.indiatimes.com/tech/technology/mobikwik-continues-profitable-streak-for-second-quarter-in-a-row/articleshow/104183594.cms?from=mdr.
[32] CRED, https://cred.club/ipl (last visited Jun. 07, 2024).
[33] Eight other apps had between 0.25% and 0.75% of transaction volume and/or value: Amazon Pay, ICICI Bank Apps, Fampay, Kotak Mahindra Bank Apps, HDFC Bank Apps, WhatsApp, BHIM, and Yes Bank Apps.
[34] Upasana Taku, NPCI’s 1.1% Interchange Fee on UPI Payments Via Wallet – The Watershed Moment for Fintech in India, The Times of India (May 15, 2023), https://timesofindia.indiatimes.com/blogs/voices/npcis-1-1-interchange-fee-on-upi-payments-via-wallet-the-watershed-moment-for-fintech-in-india.
[35] Pratik Bhakta, Inside Paytm’s Cashback Offers for Retailers, The Economic Times (Jul. 7, 2023), https://economictimes.indiatimes.com/tech/startups/in-through-the-other-door-inside-paytms-cashback-offers-for-retailers/articleshow/101551675.cms?from=mdr.
[36] Mayur Shetty, PhonePe Cuts Fees for Payment Gateway Services, The Times of India (Jun. 14, 2023), https://timesofindia.indiatimes.com/business/india-business/phonepe-cuts-fees-for-payment-gateway-services/articleshow/100986915.cms.
[37] Manish Singh, Google’s New Plan to Push Google Pay in India: Cashback Incentives in Android Apps, TechCrunch (May 16, 2019), https://techcrunch.com/2019/05/16/google-pay-india-android-cashback.
[38] Paytm, supra note 20.
[39] An Overview of Merchant Discount Rate Charges, AMLegals (Mar. 15, 2024), https://amlegals.com/an-overview-of-merchant-discount-rate-charges.
[40] CRED Pay, https://cred.club/cred-pay/onboarding (last visited Jun. 7, 2024).
[41] Roll Back Zero Merchant Discount Rate on UPI, Rupay Debit Card Payments, Industry Body Payments Council of India Writes to Finance Ministry, The Indian Express (Jan. 23, 2022), https://indianexpress.com/article/business/banking-and-finance/merchant-discount-rate-rollback-on-upi-rupay-debit-cards-7737229.
[42] Pratik Bhakta, Fintechs Await Government Word on MDR Subsidy Allocation, The Economic Times (Feb. 22, 2024), https://economictimes.indiatimes.com/tech/technology/fintechs-await-government-support-for-promoting-digital-payments-for-current-fiscal/articleshow/107891943.cms?from=mdr.
[43] Morris et al., supra note 2.
[44] Ajinkya Kawale, NPCI to Review by End of Year Decision on 30% UPI Market Share Cap, Business Standard (Apr. 19, 2024), https://www.business-standard.com/markets/news/npci-to-review-30-market-share-cap-decision-by-year-end-124041901059_1.html.
[45] Author’s translations from the Spanish original are approximate.
[46] Fijación Ordinaria de Comisiones Máximas del Sistema de Tarjetas de Pago, Banco Centrale de Costa Rica (Oct. 2023), 12, available at https://www.bccr.fi.cr/en/payments-system/DocCards/Estudio_tecnico_2023_fijacion_ordinaria_comisiones_CP.pdf.
Scholarship Abstract This paper explores the evolving landscape of competition law enforcement, focusing on the dynamic interplay between ex-ante and ex-post approaches. Amidst the digital transformation . . .
This paper explores the evolving landscape of competition law enforcement, focusing on the dynamic interplay between ex-ante and ex-post approaches. Amidst the digital transformation and regulatory shifts, traditional enforcement mechanisms are being reevaluated. This study aims to dissect the economic rationale behind these shifts, proposing a hybrid framework that balances legal certainty with the flexibility needed to address contemporary market challenges.
Popular Media The Federal Communications Commission’s (“FCC”) recent order to reclassify broadband internet access as a Title II “telecommunications service” under the Communications Act, will subject the . . .
The Federal Communications Commission’s (“FCC”) recent order to reclassify broadband internet access as a Title II “telecommunications service” under the Communications Act, will subject the industry to extensive public utility style regulation. While “net neutrality” principles drove were the initial justifications for Title II, the FCC’s current rationale has shifted to national security, public safety, and privacy concerns and broader regulatory control. Title II’s comprehensive regulatory framework threatens to commoditize broadband by banning practices like paid prioritization, zero-rating, and usage-based pricing, thereby reducing consumer choice and stifling innovation. Such heavy-handed regulation is unnecessary given the increasing competition in broadband markets from new technologies like 5G and satellite internet. Title II common carrier regulation is an outdated regulatory model ill-suited for modern broadband services and may do more harm than good for consumers.
Net neutrality is the idea that internet service providers (“ISPs”) should treat all data transmitted over the internet the same, and should not discriminate among consumers, entities that provide content, or applications that use the internet. Whether net neutrality should be mandated by rules and regulations — such as the Federal Communications Commission’s (“FCC”) latest net-neutrality regulations — has been a highly controversial topic since the early 2000s. The FCC has imposed net-neutrality rules twice before, in 2010 and 2015, only to see them struck down by courts or repealed, as the commission’s partisan makeup changed. Last month, in a party line vote, the Commission voted to regulate broadband internet under Title II of the Communications Act and impose net-neutrality rules.[1]
For much of the internet’s history, broadband telecommunications have been regulated as an “information service” under Title I of the Communications Act, which is widely considered to be a relatively light-touch regulatory framework. Since the FCC’s 2015 Open Internet Order, the agency has attempted to reclassify broadband as a “telecommunications service” under Title II, subject to the more heavy-handed regulation imposed on public utilities and “common carriers.” Under Title II, broadband companies are required to provide service to all customers equally and may be subject to public-utility-style regulation, including price controls, certificates of convenience and necessity, and quality-of-service requirements.
Because regulation under Title II entails much more than just net neutrality, critics complain that reclassifying broadband providers as common carriers amounts essentially to a federal takeover of a large part of the U.S. economy, used by nearly every American every day. On the other hand, proponents claim that precisely because broadband is so important to the economy, and even to the functioning of society, it must be managed by a government agency that will ensure equal access, maintain privacy and free speech, and protect national security and public safety.
While net neutrality is just a small piece of Title II, Title II is just one cog in massive gearwork of new federal regulations affecting nearly every aspect of access and use of the internet. Under rules adopted by the FCC, broadband deployment, upgrades, pricing, promotions, quality of service, and even marketing and advertising are now subject to FCC monitoring, scrutiny, and enforcement.
In this article, we provide a brief historical overview of net neutrality, including the debates over whether internet service is best classified as a Title I information service or at Title II telecommunications service, and how understanding of the underlying concerns has changed over the past 25 years. We then take a deeper look at what Title II regulation involves, to understand whether it is suitable to address contemporary concerns. We conclude by examining Title II within a broad regulatory framework that is — intentionally or unintentionally — banning or hindering many of the dimensions across which broadband providers compete. Some may argue that the commodification of broadband will nudge broadband toward a more competitive market with standardized (or near-standardized) products. In the process, however, consumers will see dwindling options among service offerings much like Henry Ford’s quip that consumers could get a Model T in any color they like, so long as it’s black.
Columbia Law School Professor Tim Wu is credited with articulating the concept of “net neutrality” as an anti-discrimination framework, “to give users the right to use non-harmful network attachments or applications, and give innovators the corresponding freedom to supply them.”[2] In a letter to the FCC, Wu & Lawrence Lessing drew a comparison to electric utilities which, as common carriers, provide electricity to all paying customers “without preference for certain brands or products.”[3] Indeed, Wu argued that his net neutrality proposal was “similar” to historic common carriage requirements.[4]
In the years since Wu introduced the term, net-neutrality policies have focused on the prohibition of three practices:
In 2004, FCC Chair Michael Powell articulated four “Internet Freedoms,” derived from Wu & Lessig’s work.[8] These were subsequently incorporated into the FCC’s 2005 “Internet Policy Statement.”[9]
By this point, the question of Title I versus Title II classification had become a central fracture point in discussions of net neutrality. On its face, Title I offers the FCC little, if any, substantive regulatory authority — indeed, it was created to differentiate unregulated services ancillary to the core telephone network services that the FCC regulated throughout the 20th century. Conversely, Title II provides the FCC with pervasive regulatory authority over the traditional telephone network, from pricing decisions to decisions over what services to offer and even what furniture to buy for meeting rooms.[10] Starting in the late 1990s, the FCC argued that internet service was best treated under Title I. The 9th Circuit Court of Appeals subsequently determined that internet service was better understood as a Title II service. The FCC disagreed and, in Brand X the Supreme Court held that the FCC’s determination takes precedence over that of the federal courts.
Thus, understanding of how internet services would be classified went from Title I, to Title II, and back to Title I over a period of seven years: The battle for classification had begun. That continued in the 2010 and 2015 Orders (in which the FCC relied on Title I and then Title II, respectively).
In 2010, the agency issued its Preserving the Open Internet Order, prohibiting blocking and unreasonable discrimination as well as mandating providers disclose the network management practices, performance characteristics, and terms and conditions of their broadband services.[11] In separate 2010 and 2014 cases, The DC Circuit Court of Appeals struck down the 2010 Order’s net neutrality requirements.[12] The courts noted that, because broadband providers were regulated under Title I as information services, they were not common carriers and could not be subject to net neutrality’s common carriage rules. A little more than a year after the court’s 2014 decision, in 2015, the FCC adopted the Open Internet Order, that reclassified broadband internet as a Title II common carrier telecommunication service and adopted new net neutrality rules prohibiting blocking, throttling, and paid prioritization.[13] The order also imposed a “general conduct” rule that prohibited broadband providers from “unreasonably interfer[ing] or unreasonably disadvantag[ing]” users from accessing the content or services of their choice.
In 2017, the FCC reversed course and repealed the 2015 Order with its Restoring Internet Freedom Order.[14] The order (again) reclassified broadband as a Title I information service, thereby eliminating net neutrality and general conduct rules. The order also preempted any state or local laws “that would effectively impose rules or requirements that [the FCC] repealed or decided to refrain from imposing,” or that would impose “more stringent requirements for any aspect of broadband service” addressed by the 2017 Order. In 2019, an appeals court upheld much of the order, but vacated the order’s preemption of state and local laws.[15]
Until recently, much of the debate was over whether net neutrality was necessary and how it would affect continued investment by ISPs’ in their networks. Advocates for federal intervention claimed it was necessary for the FCC to preserve or foster the “open internet” by mandating net neutrality. Opponents countered that such intervention was (1) unnecessary because providers were not engaging in widespread practices contrary to net neutrality, and (2) harmful because the prohibitions were so tight that they would stifle investment and innovation in new business models.
Something happened along the way from then to now: No one seems to care much about net neutrality anymore.[16] One reason is because most people are happy with their internet service. Since 2021, more households are connected to the internet, broadband speeds have increased while prices have declined, more households are served by more than a single provider, and new technologies — such as satellite and 5G — have expanded internet access and intermodal competition among providers.[17] Another reason is a shift in perception of who is blocking or throttling content. Much of that ire has turned towards websites, apps, and device providers.[18] Much of the public no longer sees broadband providers as the bogeymen.
The FCC itself seems to have downgraded “net neutrality” as a justification for heavy handed Title II regulation in favor of other reasons. For example, “national security” was mentioned only three times in the 2015 Order, but 181 times in the 2024 Order. The 2015 Order makes no mention of China, Russia, Iran, North Korea, or “data security;” in the 2024 Order China is mentioned 140 times and “data security” 15 times. Cybersecurity got a single mention in the 2015 Order, but 73 in the 2024 Order. This is a pretty clear indication that the FCC intends to do much more with its expansive Title II powers than merely prevent blocking, throttling, and paid prioritization.
Net neutrality is often used as the hook for regulating broadband providers as common carriers. But Title II is an expansive provision in the Communications Act. Among its many provisions, Title II allows federal rate regulation of broadband, as well as Section 214 “certificate of convenience and necessity” regulations requiring providers to obtain the FCC’s approval before constructing new networks, offering new services, discontinuing outdated offerings, or transferring control of licenses. The Commission’s order forbears rate regulation and grants “blanket” Section 214 authority to all current broadband providers, with the exception of five Chinese providers.
The 2024 Order’s “general conduct standard” provides the FCC with unlimited discretion to intervene in innovative business models. The order states the general conduct standard “prohibits unreasonable interference or unreasonable disadvantage to consumers or edge providers” that serves as a “catch-all backstop” to allow the FCC to intervene when it finds that an ISP’s conduct could harm consumers or content providers.
The FCC has a history of invoking the general conduct standard to scrutinize two common practices:
Zero-rating is the practice of excluding certain online content or applications from a subscriber’s allowed data usage. For example, when AT&T owned HBO, it exempted HBO Max content from AT&T users’ data allowance.
Zero-rating can make some popular services more accessible and affordable for lower-income users, who may have limited data plans. Zero-rating also allows ISPs to offer value-added services and to differentiate their offerings, spurring competition and innovation in the broadband market.
In December 2016, the FCC sent letters to both AT&T and Verizon Communications, warning their zero-rating programs could harm competition and consumers.[19] In the last days of the Obama administration, the FCC released a staff review of sponsored data and zero-rating practices in the mobile-broadband market concluding such practices “may harm consumers and competition… by unreasonably discriminating in favor of select downstream providers.”[20] Less than a month later, in the early days of the Trump administration, the FCC retracted the report.[21]
We can expect that under the 2024 Order — identical in most ways to the 2015 Order under which these practices were investigated — the Commission will once again use its powers to scrutinize zero-rating practices with an eye toward prohibiting them. Indeed, the 2024 Order characterizes, “sponsored-data programs as the type of practices that may raise concerns under the general conduct standard” that will be subject to a “case-by-case review.”
Usage-based pricing can be thought of as a “pay-as-you-go” plan in which consumers pay in advance for a certain amount of data per month. If they exceed that amount (what some would call a “cap”), then the consumer has the option to purchase more data. Some consumer groups claim that data caps and usage-based pricing are little more than a “money grab” by providers who derive additional revenue from overage charges or by upgrading users to a tier with a larger data allowance.[22] On the other hand, providers say that usage-based pricing is no different from nearly every other consumer product in which consumers pay for what they use. They argue that, without usage-based pricing, modest users of data would subsidize those who use copious amounts of data.[23]
In June 2023, FCC Chair Jessica Rosenworcel announced that she would ask her fellow commissioners to support a formal notice of inquiry to learn more about how broadband providers use data caps on consumer plans.[24] That same day, the FCC launched a “Data Caps Stories Portal” for “consumers to share how data caps affect them.” The 2024 Order indicates “providers can implement data caps in ways that harm consumers or the open Internet” and the FCC will “evaluate individual data cap practices under the general conduct standard.”
If, however, sponsored-data, zero-rating, data caps, and usage-based pricing practices harm competition or consumers, these concerns can be addressed with a straightforward application of existing antitrust and consumer-protection laws. Antitrust enforcers and courts assess such practices under the rule of reason — an approach that avoids a presumptive condemnation because they only rarely result in actual anticompetitive harm. Under a rule-of-reason approach, the effects of potentially harmful conduct are typically evaluated and weighed against the various aims that competition law seeks to promote. Only following that review is it determined whether particular conduct is harmful and, if so, whether there are procompetitive benefits that outweigh the harm.
Consumer protection is the purview of the Federal Trade Commission. Section 5 of the FTC Act prohibits “unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce.” The FTC has a long history of using its authority, such as recent actions to protect the privacy of consumers’ health records.[25] But, the FTC has no Section 5 authority over “common carriers subject to the Acts to regulate commerce,” which includes, according to the FTC Act, the “Communications Act of 1934 and all Acts amendatory thereof and supplementary thereto.” Thus, by classifying broadband providers as Title II common carriers, the FCC has stripped the FTC of its authority to protect consumers using Section 5.
In its Notice of Proposed Rulemaking, the Commission argued that broadband internet access services are “[n]ot unlike other essential utilities, such as electricity and water” and that high-speed internet “was essential or important to 90 percent of U.S. adults during the COVID-19 pandemic.”[26] The Commission argues that broadband internet is therefore an essential public utility and should be regulated as such.
But many essentials to human survival — shelter, food, clothing — are not subject to common-carrier regulations, because they are provided by multiple suppliers in competitive markets. Utilities are considered distinct because they tend to have such significant economies of scale that (1) a single monopoly provider can provide the goods or services at a lower cost than multiple competing firms, and/or (2) market demand is insufficient to support more than a single supplier.[27] Water, sewer, electricity distribution, and natural gas are typically considered “natural” monopolies under this definition.[28] In many cases, not only are these industries treated as monopolies, but their monopoly status is codified by laws forbidding competition. At one time, local and long-distance telephone services were considered — and treated as — natural monopolies, as was cable television.[29]
Over time, innovations have eroded the “natural” monopolies in telephone and cable.[30] In 2000, 94 percent of U.S. households had a landline telephone, and only 42 percent had a mobile phone.[31] By 2018, those numbers flipped.[32] In 2015, 73 percent of households subscribed to cable or satellite-television services.[33] Today, fewer than half of U.S. households subscribe.[34] Much of that transition is due to the enormous improvements in broadband speed, reliability, and affordability. Similarly, entry and intermodal competition from 5G, fixed wireless, and satellite has meant that more than 94 percent of the country can now access highspeed broadband from three or more providers, thereby eroding the already tenuous claims that broadband-internet service is akin to a utility.
Much of the FCC’s motivation in its recent regulatory push — Title II, digital discrimination, and broadband “nutrition labels” — seems to be driven by a misplaced notion of perfect competition, as described in introductory economics textbooks. Under perfect competition, prices paid by consumers equal the marginal cost of production, that cost is the minimum average cost, and firms earn zero economic profits. Perfect competition is too perfect. While perfection can be sought, it can never be achieved in the real world because the real world is a messy place.
Perhaps the messiest assumption of perfect competition is that each firm produces undifferentiated commodity products.[35] Broadband internet service is not a commodity. Providers use different technologies (e.g. fiber, 5G, copper wire) with different performance characteristics (e.g. speed and latency). Providers offer different service agreements. Some have early termination fees, while others don’t; some have “all-you-can-eat” data usage, while other have usage-based billing; some may have zero-rating while other don’t. With so much variation in services both across and within providers, some have argued that most consumers are not well-informed — if not confused — about their broadband options.
As a first step to commoditizing broadband, at the direction of the 2021 bipartisan infrastructure bill, the FCC adopted its broadband “nutrition label” rules.[36] Providers must display a nutrition label for each plan it offers. Consumers can then use the labels as an “apples to apples” comparison across plans and providers. Despite the cost to produce the labels, the uncertainty whether consumers will find the labels useful, and whether the full force of the federal government is necessary to display the labels, it’s difficult to argue that consumers are worse off by having easy-to-use information readily available.
With the FCC’s recent digital discrimination rules, the agency took another step toward commoditizing broadband. The infrastructure act required the Commission to adopt final rules “preventing digital discrimination of access based on income level, race, ethnicity, color, religion, or national origin.”[37] The FCC could have issued a narrow rule to outlaw intentional discrimination by broadband providers in deployment decisions, in a way that would treat a person or group of persons less favorably than others because of a listed protected trait. This rule would be workable, leaving the FCC to focus its attention on cases where broadband providers fail to invest in deploying networks due to animus against those groups.
Instead, the FCC’s final order creates an expansive regulatory scheme that gives it essentially unlimited discretion over anything that would affect the adoption of broadband. It did this by adopting a differential impact standard that applies not only to broadband providers, but to anyone that could “otherwise affect consumer access to broadband internet access service.”[38] The order spans nearly every aspect of broadband deployment, including, but not limited to network infrastructure deployment, network reliability, network upgrades, and network maintenance. In addition, the order covers a wide range of policies and practices that while not directly related to deployment, affect the profitability of deployment investments, such as pricing, discounts, credit checks, marketing or advertising, service suspension, and account termination. Most troubling, the order considers price among the “comparable terms and conditions” subject to its digital discrimination rules.[39] Taken together, with these rules, the FCC gave itself nearly unlimited authority over broadband providers, and even a great deal of authority over other entities that can affect broadband access, including other federal agencies, state and local governments, nonprofit organizations, and apartment owners.
Because the infrastructure act included income level as a protected trait, the FCC opened a Pandora’s Box in which nearly any organization’s policies and practices can be scrutinized as discriminatory.[40] For example many providers offer plans explicitly targeted at low-income consumers, such as Xfinity’s Internet Essentials program.[41] These programs are at risk of scrutiny under the digital discrimination rules. Moreover, the rules will likely stifle new deployment or upgrades out of fear of alleged disparate effects. If they don’t upgrade everyone, they could be accused of discrimination. At the extreme, providers will be faced with the choice to upgrade everyone or upgrade no one. Because they cannot afford to upgrade everyone, then they will upgrade no one.
While unintentional, the digital discrimination rules are another step toward commoditization. Providers must offer comparable speeds, capacities, latency, and other quality of service metrics in a given area, for comparable terms and conditions, including price, thereby erasing many of the dimensions across which providers compete.
Lastly under Title II and its net neutrality provisions, the FCC is erasing more competitive dimensions. Banning paid prioritization forces all data to be treated equally, even if customers or services would benefit from differentiated offerings. Without flexibility in how services are delivered and priced, companies lose incentives to develop better networks and new innovations for specific use cases like high-bandwidth video streaming or remote medical services. A ban on data throttling removes essential network-management tools that could prevent congestion and improve overall customer experience. If — as expected — the FCC moves to ban zero-rating and usage-based billing, consumers will have even fewer choices among broadband internet services. In the extreme, providers will simply be providing “dumb pipes” with standardized service. While such efforts may mimic perfect competition’s commodity condition, it’s not clear that consumers will benefit from one-size-fits-all broadband.
As we have recounted above, discussion about net neutrality concerns grew out of the era in which telecommunications services were provided by regulated, natural, monopoly carriers. In that era, there was legitimate need for pervasive regulation of these carriers. But these discussions also started concurrent with changing competitive dynamics in these markets. This historical context centered net neutrality in debates over the ongoing basis for the FCC’s own authority: Whether the regulatory structure of Title II, long central to the FCC’s mission, is still fit to task in contemporary markets. Looking at the comprehensive regulatory framework contemplated by Title II, the answer is clear: Regulation is driving internet services toward increasingly commodity services, reducing consumer choice in the process. Much like the Model T, Title II may have been necessary in the past, but it is now an artifact of a bygone era and should be allowed to slip into history.
[1] Declaratory Ruling, Order, Report and Order, and Order on Reconsideration, In the Matter of Safeguarding and Securing the Open Internet; Restoring Internet Freedom, WC Docket No. 23-320, WC Docket No. 17-108 (Apr. 25, 2024) [hereinafter “2024 Order”].
[2] Tim Wu, Network Neutrality, Broadband Discrimination, 2 J. Telecomm. & High Tech. L. 141, 142 (2003) [emphasis in original].
[3] Tim Wu & Lawrence Lessig, Ex Parte Submission, Appropriate Regulatory Treatment for Broadband Access to the Internet Over Cable Facilities, CS Docket No. 02-52 (Aug. 22, 2003), available at https://web.archive.org/web/20041204012743/http://faculty.virginia.edu/timwu/wu_lessig_fcc.pdf (“When consumers buy a new toaster made by General Electric they need not worry that it won’t work because the utility company makes a competing product.”).
[4] Wu, supra note 2 at 150.
[5] Lawrence Lessig, Voice-Over-IP’s Unlikely Hero, Wired (May 1, 2005), https://www.wired.com/2005/05/voice-over-ips-unlikely-hero.
[6] Declan McCullagh, FCC Formally Rules Comcast’s Throttling of Bittorrent Was Illegal, CNet (Aug. 20, 2008), https://www.cnet.com/tech/tech-industry/fcc-formally-rules-comcasts-throttling-of-bittorrent-was-illegal.
[7] Chao Liu & Cooper Quintin, Internet Service Providers Plan to Subvert Net Neutrality. Don’t Let Them, Elec. Frontier Found. (Apr. 19, 2024), https://www.eff.org/deeplinks/2024/04/internet-service-providers-plan-subvert-net-neutrality-dont-let-them.
[8] Michael Powell, Preserving Internet Freedom: Guiding Principles for the Industry, 3 J. Telecomm. & High Tech. L. 5 (2004).
[9] Appropriate Framework for Broadband Access to the Internet over Wireline Facilities, 20 FCC Rcd. 14,986, 14,987-88 (2005).
[10] 47 CFR § 32.2000.
[11] Report and Order, In the Matter of Preserving the Open Internet; Broadband Industry Practices, GN Docket No. 09-191, WC Docket No. 07-52 (Dec. 21, 2010) [hereinafter “2010 Order”].
[12] For a more thorough summary, see Chris D. Linebaugh, Cong. Research Serv. LSB10693, ACA Connects v. Bonta: Ninth Circuit Upholds California’s Net Neutrality Law in Preemption Challenge (Feb. 2, 2022), available at https://crsreports.congress.gov/product/pdf/LSB/LSB10693.
[13] Report and Order on Remand, Declaratory Ruling, and Order, In the Matter of Protecting and Promoting the Open Internet, GN Docket No. 14-28 (Mar. 15, 2015) [hereinafter “2015 Order”].
[14] Declaratory Ruling, Report and Order, and Order, In the Matter of Restoring Internet Freedom, WC Docket No. 17-108 (Dec. 14, 2017) [hereinafter “2017 Order”].
[15] Mozilla Corp. v. FCC, 940 F.3d 1 (D.C. Cir., 2019)
[16] See, e.g. FCC reinstates net neutrality policies after 6 years, NPR Weekend Edition Saturday (May 4, 2024), available at https://www.npr.org/2024/05/04/1249166941/fcc-reinstates-net-neutrality-policies-after-6-years (noting that “Net neutrality was once the biggest controversy about the internet . . . .” and concluding “I think that net neutrality may be one of the most overhyped regulations on both sides.”).
[17] Eric Fruits, Ben Sperry, & Kristian Stout, ICLE Comments to FCC on Title II NPRM, Int’l Ctr. for L & Econ. (Dec. 14, 2023), https://laweconcenter.org/wp-content/uploads/2023/12/ICLE-Comments-on-2023-FCC-Title-II-NPRM.pdf\.
[18] See, for example, Oral Dissent of Brendan Carr, In the Matter of Safeguarding and Securing the Open Internet; Restoring Internet Freedom, WC Docket No. 23-320, WC Docket No. 17-108 (Apr. 25, 2024), https://youtu.be/W0CFV9DNSLU?si=dmS4MAnSvnEu-P-J (“After 2017 it wasn’t the ISPs that abuse their positions in the internet ecosystem. It was not the ISPs that blocked links to the New York Post’s Hunter Biden laptop story. Twitter did that. It wasn’t the ISPs that just one day after lobbying this FCC on this order, blocked all posts from a newspaper and removed the links to the outlet after it published a critical article. Facebook did that. It wasn’t the ISPs that earlier this month blocked links to a California-based news organization from showing up in search results to protest a state law. Google did that. It wasn’t the ISPs that blocked Beeper Mini, an app that allowed interoperability between iOS and messaging. Apple did that. Since 2017, we have learned that the real abusers of gatekeeper power were not ISPs operating at the physical layer, but big tech companies at the applications layer.”).
[19] Thomas Gryta, FCC Raises Fresh Concerns Over “Zero-Rating” by AT&T, Verizon, Wall St. J. (Dec. 2, 2016), https://www.wsj.com/articles/fcc-raises-fresh-concerns-over-zero-rating-by-at-t-verizon-1480695463.
[20] Policy Review of Mobile Broadband Operators’ Sponsored Data Offerings for Zero-Rated Content and Services (Jan. 11, 2017), https://transition.fcc.gov/Daily_Releases/Daily_Business/2017/db0111/DOC-342987A1.pdf.
[21] Order, In the Matter of Wireless Telecommunications Bureau Report: Policy Review of Mobile Broadband Operators’ Sponsored Data Offerings for Zero Rated Content and Services (Feb. 3, 2017), https://docs.fcc.gov/public/attachments/DA-17-127A1.pdf.
[22] Jon Brodkin, Comcast Disabled Throttling System, Proving Data Cap Is Just a Money Grab, Ars Technica (Jun. 13, 2018), https://arstechnica.com/tech-policy/2018/06/comcast-says-it-doesnt-throttle-heaviest-internet-users-anymore.
[23] Brian C. Albrecht & Jonathan W. Williams, Net Neutrality Is an Idea That Should Have Stayed Dead, Boston Globe (May 6, 2024), https://www.bostonglobe.com/2024/05/06/opinion/net-neutrality-data-caps. See also, Eric Fruits, The Curious Case of the Missing Data Caps Investigation, Truth on the Market (Feb. 5, 2024), https://truthonthemarket.com/2024/02/05/the-curious-case-of-the-missing-data-caps-investigation.
[24] Chairwoman Rosenworcel Proposes to Investigate How Data Caps Affect Consumers and Competition (Jun. 15, 2023), https://docs.fcc.gov/public/attachments/DOC-394416A1.pdf.
[25] Elisa Jillson, Protecting the Privacy of Health Information: A Baker’s Dozen Takeaways from FTC Cases (Jul. 25, 2023), https://www.ftc.gov/business-guidance/blog/2023/07/protecting-privacy-health-information-bakers-dozen-takeaways-ftc-cases.
[26] Notice of Proposed Rulemaking, In the Matter of Safeguarding and Securing the Open Internet, WC Docket No. 23-320 (Sep. 28, 2023), available at https://docs.fcc.gov/public/attachments/DOC-397309A1.pdf.
[27] See Paul Krugman & Robin Wells, Economics 389 (4th ed. 2015) (“So the natural monopolist has increasing returns to scale over the entire range of output for which any firm would want to remain in the industry—the range of output at which the firm would at least break even in the long run. The source of this condition is large fixed costs: when large fixed costs are required to operate, a given quantity of output is produced at lower average total cost by one large firm than by two or more smaller firms.”).
[28] Id. (“The most visible natural monopolies in the modern economy are local utilities—water, gas, and sometimes electricity. As we’ll see, natural monopolies pose a special challenge to public policy.”).
[29] See Richard H. K. Vietor, Contrived Competition 167 (1994) (“[I]n the early part of the twentieth century, American Telephone and Telegraph (AT&T) set itself the goal of providing universal telephone services through an end-to-end national monopoly. … By [the 1960s], however, the distortions of regulatory cross-subsidy had diverged too far from the economics of technological change.”); see also Thomas W. Hazlett, Cable TV Franchises as Barriers to Video Competition, 2 Va. J.L. & Tech. 1, 1 (2007) (“Traditionally, municipal cable TV franchises were advanced as consumer protection to counter “natural monopoly” video providers. … Now, marketplace changes render even this weak traditional case moot. … [V]ideo rivalry has proven viable, with inter-modal competition from satellite TV and local exchange carriers (LECs) offering “triple play” services.”).
[30] See id. at 59-73.
[31] Share of United States Households Using Specific Technologies, Our World in Data (n.d.), https://ourworldindata.org/grapher/technology-adoption-by-households-in-the-united-states.
[32] Id. (showing household usage of landlines and mobile phones in 2018 at 42.7 and 95 percent, respectively).
[33] Edward Carlson, Cutting the Cord: NTIA Data Show Shift to Streaming Video as Consumers Drop Pay-TV, NTIA (2019), https://www.ntia.gov/blog/2019/cutting-cord-ntia-data-show-shift-streaming-video-consumers-drop-pay-tv.
[34] Karl Bode, A New Low: Just 46% of U.S. Households Subscribe to Traditional Cable TV, TechDirt (Sep. 18, 2023), https://www.techdirt.com/2023/09/18/a-new-low-just-46-of-u-s-households-subscribe-to-traditional-cable-tv. See also, Shira Ovide, Cable TV Is the New Landline, N.Y. Times (Jan. 6, 2022), https://www.nytimes.com/2022/01/06/technology/cable-tv.html.
[35] Krugman & Wells, supra note 28 at 360 (“A perfectly competitive industry must produce a standardized product.”), 359 (“a standardized product, which is a product that consumers regard as the same good even when it comes from different producers, sometimes known as a commodity”) [emphasis in original].
[36] Order, In the Matter of Empowering Broadband Consumers Through Transparency, CG Docket No. 22-2 (Jul. 18, 2023), available at https://docs.fcc.gov/public/attachments/DA-23-617A1.pdf.
[37] Pub. L. No. 117-58, § 60506(b)(1), 135 Stat. 429, 1246.
[38] See 47 CFR §16.2 (definition of “Covered entity” and “Covered elements of service”).
[39] Report and Order and Further Notice of Proposed Rulemaking, In the Matter of Implementing the Infrastructure Investment and Jobs Act: Prevention and Elimination of Digital Discrimination, GN Docket No. 22-69 (Oct. 25, 2023), available at https://docs.fcc.gov/public/attachments/DOC-397997A1.pdf (“Indeed, pricing is often the most important term that consumers consider when purchasing goods and services… this is no less true with respect to broadband internet access ser-vices.”).
[40] Eric Fruits, Everyone Discriminates Under the FCC’s Proposed New Rules, Truth on the Market (Oct. 30, 2023), https://truthonthemarket.com/2023/10/30/everyone-discriminates-under-the-fccs-proposed-new-rules.
[41] Internet Essentials, (2024), https://www.xfinity.com/learn/internet-service/internet-essentials.
Presentations & Interviews ICLE Chief Economist Brian Albrecht was a participant in a virtual debate hosted by the American Bar Association’s Antitrust Law Section on the economics of . . .
ICLE Chief Economist Brian Albrecht was a participant in a virtual debate hosted by the American Bar Association’s Antitrust Law Section on the economics of noncompete agreements, and whether the evidence justifies the Federal Trade Commission’s sweeping ban. Video of the full event is embedded below.
Presentations & Interviews ICLE Academic Affiliate Giuseppe Colangelo was a guest on a recent Hands-On Law & Tech webinar focused on the latest developments in regulation of standard-essential . . .
ICLE Academic Affiliate Giuseppe Colangelo was a guest on a recent Hands-On Law & Tech webinar focused on the latest developments in regulation of standard-essential patents (SEPs). The full video is embedded below.
Regulatory Comments I. Introduction/Summary We appreciate the opportunity to respond to this request for information on consolidation in health-care markets, Docket No. ATR-102, issued by the U.S. . . .
We appreciate the opportunity to respond to this request for information on consolidation in health-care markets, Docket No. ATR-102, issued by the U.S. Justice Department (DOJ), the U.S. Department of Health and Human Services (HHS), and the Federal Trade Commission (FTC) (collectively, “the agencies”).[1] We agree wholeheartedly that robust competition in health-care markets is critical to consumer welfare and the U.S. economy. As an FTC staff policy paper summarized, “[c]ompetition in health care markets benefits consumers by helping to control costs and prices, improve quality of care, promote innovative products, services, and service delivery models, and expand access to health care services and goods.”[2] Conversely, anticompetitive health-care acquisitions can harm competition and consumer welfare; there is a substantial economic literature to that effect.[3] The agencies, over decades, have done well to oppose such mergers and, as a related matter, attempts to insulate such mergers from federal antitrust scrutiny.[4] Hence, the agencies have important roles to play in protecting health-care competition, as they enforce key federal statutes relevant to it, including the general antitrust laws that are enforced by the FTC and the DOJ,[5] and that apply across health-care markets, among others. Effective and accurate antitrust enforcement is a key component of health-care policy, and one that tends to benefit patients and other health-care consumers, including both private and public payers.
We recognize that the FTC also has a distinctive research and reporting mission assigned by Congress under Section 6 of the FTC Act, and that it has decades of experience engaging in policy and economic research, both internally and in cooperation with DOJ and HHS.[6] Acknowledging express statutory limits—such as the restriction on studies and reports regarding the business of insurance under Section 6(l) of the FTC Act[7]—the fulfillment of that research mission across health-care markets has been wide-ranging; and, as described below, it has often found salutary application in antitrust enforcement.
Our response to the agencies’ RFI comprises, at the highest level of generality, one observation and one recommendation. The observation is that, while health-care-provider acquisitions remain an extremely important domain of merger scrutiny, neither enforcement experience nor the economic literature support any fundamental changes in procedural or substantive antitrust law or regulation, whether for provider acquisitions generally or any of the categories of acquirers specified in the RFI. Competition policy is not, and should not be, static. At the same time, sound policy reform is a difficult, stepwise process, and one that requires a firm foundation in both research and enforcement experience, along with attention to established precedent. Information submitted in response to the RFI may well contribute to the agencies’ aggregate knowledge base on provider transactions. But the present inquiry does not appear designed to move that body of knowledge much beyond the margin. Indeed, as explained below, FTC research and enforcement experience underscore not just the importance of health-care competition, but also how complex the tasks of merger scrutiny and reform are.
Correspondingly, our overarching recommendation is that the agencies build on the substantial body of research regarding mergers and acquisitions in the health-care sector that has been conducted over the course of several decades by agency staff and others. That body of research includes, notably, contributions made by the staff of the FTC Bureau of Economics (BE).[8] More specifically, to that end, we recommend that economic and policy staff at the agencies synthesize the extant body of research at their disposal. To be sure, market developments, and developments in research methods and available data, may suggest new avenues of research, as well as those in need of significant updates. But a serious, critical synthesis of the available literature will only help to sharpen the agencies’ sense of new research demands, just as it will provide a basis on which to contemplate new enforcement initiatives. Such a synthesis can also ground more focused and productive requests for information on critically important issues in health-care competition going forward.
Our recommendation of such a research synthesis or review is consistent with the agencies’ acknowledgement that they may require “additional proceedings, including workshops or other public engagement, to learn more about [concerns identified in response to the RFI].”[9] While such workshops and other engagements have been a useful component of the agencies’ understanding of health-care-competition policy, we stress that they should be seen as complements to rigorous systematic research. And both should be seen as complements to building on case-specific agency enforcement experience, which typically scrutinizes the specific facts and circumstances of transactions and other firm conduct.
For example, in many smaller markets, independent providers of hospital-based services, such as anesthesiology, may be highly concentrated on any standard for “highly concentrated” markets.[10] Further research might aid the agencies in examining highly concentrated provider markets to develop filters or screens for provider acquisitions below the Hart-Scott-Rodino filing threshold, so that the agencies might identify and investigate those sub-threshold filings that are the most likely candidates for investigations and, depending on the results of those investigations, enforcement actions. Efficient matter-selection tools will be critical to that effort, less the agencies commit scarce resources to small, unpromising investigations and impose undue costs on health-care providers.
In our comments below, we recognize that the agencies themselves have established models for building the sort of “policy R&D” contemplated by the RFI in a way that complements their enforcement mandates. Also, we understand that the RFI is but one of the tools the agencies use to further their understanding of provider consolidation.[11] And, indeed, the RFI may contribute to the larger health-care-competition R&D programs at the agencies, if only at the margin.
At the same time, we write to note certain concerns about the agencies’ framing of their RFI, including, specifically, elements of the RFI that appear to be in tension with learning from agency-sponsored research and agency-enforcement experience.
Some of our concerns may be summarized as follows:
First, evidence and enforcement experience do not identify categories of health-care acquisitions that “always or almost always” impede competition and reduce output. That militates against per se prohibitions. Absent an express charge from Congress, new competition regulations regarding health-care acquisitions are not justified.
Second, agency experience—and, indeed, the FTC’s landmark success in the 2nd U.S. Circuit Court of Appeals in the American Medical Association case[12]—suggests legitimate competition concerns about undue restraints on “the corporate practice of medicine.” More broadly—and consistent with longstanding agency practice—the agencies should be cautious about drawing general conclusions about whole industries, business models, or methods of health-care delivery, and more cautious still in condemning them.
Third, while there is no doubt that provider consolidation can be anticompetitive, the relationship between concentration and competition is complex, both as a general matter and—on current understanding—across the various sectors and subsectors identified in the RFI. That general point has been illustrated by BE staff research, even as that research has helped to refine and strengthen appropriate antitrust scrutiny of health-care provider mergers and acquisitions.
Fourth, it is well-understood that vertical acquisitions can harm competition and consumers under certain conditions. At the same time, vertical mergers are not generally—or even typically—anticompetitive. Vertical mergers may entail certain efficiencies, and are commonly procompetitive or benign on net, as research by agency personnel and the larger academic community has demonstrated. Analogously, while conglomerate mergers may raise competition concerns, they are not generally anticompetitive.
Fifth, the RFI’s framing seems problematic—both uncharacteristic of open inquiry and in tension with antitrust experience and its economic foundations. For example, we question a statement at the outset of the RFI: “Given recent trends, we are concerned that transactions may generate profits for those firms at the expense of patients’ health, workers’ safety, and affordable health care for patients and taxpayers.”[13] To be sure, some provider transactions, under particular facts and circumstances, may harm competition and consumer welfare, in violation of the antitrust laws.[14] But the agencies understand that antitrust law and economics do not recognize any general or fundamental tension between firm profits on the one hand, and the consumer benefits typically associated with competition on the other. Indeed, FTC research and enforcement have specifically undermined the notion that not-for-profit provider mergers should be treated differently under the antitrust laws.[15]
More generally, health-care acquisitions can prove anticompetitive, procompetitive, or benign, but the RFI pointedly does not request information on potential patient or payor benefits that may be associated with consolidation. More generally, the RFI does not seem to recognize that health-care acquisitions commonly entail tradeoffs of benefits and costs. Such tradeoffs are well-documented in the literature and are recognized in U.S. merger jurisprudence.
As a related matter, the FTC’s recent workshop, “Private Capital, Public Impact: An FTC Workshop on Private Equity in Health Care,”[16] seemed uncharacteristically lax and imbalanced. The workshop was announced and timed to make it appear a complement to the RFI.[17] While sponsored by the FTC, leadership from the DOJ and HHS also participated. But there were no participants from the industry in question or from insurers, large health plans, or other private payors. Instead, participants—including those providing largely anecdotal evidence—appear to have been chosen exclusively for the purpose of representing agency and third-party criticism of private equity in health care. That is, the workshop seems to have been conclusory by design.
A 2009 report by then-FTC Chairman William Kovacic defines “policy R&D” broadly in a way that comprises, but is not limited to, original, author-initiated academic research by BE staff.[18] It also incorporates diverse forms of policy inquiries, including, e.g., hearings,[19] workshops,[20] conferences,[21] and, indeed, requests for public information.[22] These can all be mutually reinforcing, providing expert input that range from issue-spotting to literature review, to the presentation of new data and studies, as well as diverse perspectives on agency interests and activities. They can, in turn, help to inform case selection and enforcement, just as enforcement experience can yield data and other inputs into subsequent policy R&D. But one need not gainsay concerns about health-care competition or specific types of acquisitions to appreciate the difficulty of grounded, systematic reform of enforcement policy in these areas. We appreciate the agencies’ recent extension of the deadline for submissions in response to the RFI; that will likely increase the utility of the inquiry. Still, while the present RFI may be a useful endeavor, it is just one tool—in itself, a limited one—in the agencies’ “policy R&D” toolbox.
Below, we sketch some of the long-running developments in the agencies’ policy R&D pertinent to provider acquisitions and health-care consolidation. Our description of the many pertinent agency endeavors focuses on work by FTC staff and leadership, in large part because of the FTC’s enforcement experience with provider mergers and its sustained health-care-competition research program. We recognize, of course, that DOJ and HHS have also made substantial contributions of their own and, in turn, that the empirical literature regarding health-care consolidation is considerable, if not vast. We recognize, too, that inquiries are ongoing, and not restricted to the RFI. Our sketch is an abridged one, partly because the agencies—and, certainly, the FTC Bureau of Economics—are well familiar with their own research programs, just as they are familiar with the challenges of building lasting enforcement reforms.
On the one hand, we mean to underscore the advances made in understanding the competitive effects of provider consolidation and its potential—both realized and residual—for application in rigorous enforcement. At the same time—and based in no small part on their own contributions to understanding health-care consolidation—the agencies should appreciate the complexity and challenge of the Policy R&D project, both across health-care sectors and within them. That complexity and challenge militate against hasty conclusions about, e.g., specific sectors, business models, and competitive trends.
Varied hearings, workshops, RFIs, and other agency policy tools have played a significant role in developing competition policy at the agencies, even if no single agency workshop or RFI is likely to generate a record adequate to justify a significant change in enforcement policy. For example, from February through October 2003, FTC and DOJ jointly conducted 27 days of hearings on health-care-competition issues, with testimony from diverse stakeholders from academia, industry, and, not incidentally, agency staff.[23] Although HHS did not cosponsor those hearings, representatives from various HHS agencies—including the Centers for Medicare & Medicaid Services (CMS) and the Agency for Healthcare Research and Quality (AHRQ)—provided testimony and otherwise consulted on the hearings.
Based on the record of those hearings, an FTC-sponsored workshop in September 2002, and independent research (including applied-industrial-organization research conducted within and without the agencies), FTC and DOJ jointly published a substantial policy report in 2004.[24] The report reviewed systematic research, diverse stakeholder perspectives, and numerous health-care-competition policy issues. It also presented concrete policy recommendations by FTC and DOJ, drawn from that review.[25]
Follow-up workshops conducted by FTC staff, such as the 2008 workshop “Innovations in Health Care Delivery,”[26] also included participation by HHS personnel, including that of the national coordinator for health information technology and the deputy director for health information privacy at the HHS Office for Civil Rights.[27] A 2014 FTC workshop[28] and 2015 joint FTC/DOJ workshop[29] on health-care-competition issues both similarly involved officials and other personnel from HHS, FTC, DOJ, and other agencies, as well as academics, practitioners, and diverse industry stakeholders.
More focused health-care-competition and policy workshops have also informed agency enforcement policy. For example, a 2010 workshop on accountable care organizations (ACOs) jointly conducted by the FTC, the DOJ, and HHS, together with a 2011 FTC workshop on ACOs (with participation from DOJ staff),[30] informed the joint FTC/DOJ enforcement-policy statement on ACOs,[31] which was developed in consultation with the HHS Centers for Medicare and Medicaid Services, and which applied to specific forms of provider collaborations (not mergers) under the Medicare Shared Savings program.
The wide-ranging policy inquiries described above were not conducted in a vacuum. Rather, they build on a larger body of economic research and enforcement experience, including, notably, research on health-care competition from within and without BE, coupled with enforcement by the FTC Bureau of Competition. Staff and management in BE have made substantial contributions to the study of competition in health-care markets, with a focus on the study of provider consolidation;[32] and the FTC’s longstanding, multi-pronged investigation of provider consolidation represents a signal model of the application of applied-industrial-organization research to policy development and law enforcement.[33]
Many—including current leadership at the antitrust agencies,[34] among others[35]—have recognized that BE research, specifically, has had a significant impact on the courts’ treatment of provider mergers. Between 1993 and 2000, antitrust enforcers challenged eight hospital mergers, losing all eight challenges.[36] Hospital-merger challenges waned, and might have been abandoned, but the losing streak spurred renewed research efforts, both within the bureau and across the academy.[37] Critically, BE staff undertook a series of merger-retrospective studies, with then-FTC Chairman Timothy Muris initiating a program of merger-review studies that built on, for example, Vita & Sacher’s 2001 study, “The Competitive Effects of Not-for-Profit Hospital Mergers: A Case Study.”[38]
Subsequent provider-merger-retrospective studies have ranged from individual case studies to reviews of dozens of consummated provider mergers.[39] These are, in essence, forensic investigations, aiming “to determine ex post how, if at all, a particular merger affected equilibrium behavior in one or more markets.”[40] The retrospectives have helped to refine merger-screening methods employed within the FTC; and they have been widely credited with reversing the way that hospital mergers are viewed in the courts.[41] As Michael Salinger observes in a recent article in the Review of Industrial Organization, the retrospective studies grounded testimony in, e.g.:
the FTC’s successful challenge to Evanston-Northwestern Healthcare’s acquisition of the Highland Park Hospital . . . and the empirical methods the Bureau of Economics developed (in conjunction with noted academic health care economists) were essential to subsequent success of the Agencies in challenging hospital mergers.[42]
Especially important to litigation challenges were results on the price effects of not-for-profit hospital mergers (which some courts had supposed were generally benign) and on methods of geographic-market definition (where some courts had been inclined toward very broad geographic markets).[43] Subsequent provider retrospectives have extended the scope of the body of work, considering, e.g., nonprice effects,[44] and merger-screening methods more broadly.[45] Indeed, subsequent studies have not been confined to hospital mergers, but have examined, for example, mergers of physician practice groups[46] and the acquisition of physician practices by hospitals.[47]
Of course, retrospective studies of provider mergers at the enforcement margin have limitations, as well as advantages.[48] Critically, the retrospective studies are not conducted or considered in isolation; rather, they complement methodologically diverse studies of hospital mergers and other forms of provider consolidation, including observational studies based on panel data and cross-sectional data,[49] event studies,[50] and theoretical work.[51] Research has also examined the interaction between providers and third-party payors, as it shapes the nature of competition in health-care-provider markets,[52] as well as vertical[53] and cross-market acquisitions.[54]
Several of the annual review papers published by BE (first, by the FTC, and subsequently by the Review of Industrial Organization) provide brief reviews and, importantly, sketch the application of the academic research to provider merger reviews.[55] Learning from the body of research has, in turn, informed investigations of transactions involving, e.g., outpatient kidney-dialysis centers and specialty surgical centers, as well as physician and hospital mergers.[56]
The agencies state that the RFI will inform, inter alia, “new regulations aimed at promoting and protecting competition in health care markets.”[57] Absent a notice of proposed rulemaking (NPRM), it is unclear what is being contemplated, and correspondingly unclear how the RFI might lead to an NPRM from any of the three agencies. Certainly, FTC and HHS already enforce consumer-protection regulations, issued under express congressional charges, that may have procompetitive effects.[58] These include, for example, the FTC’s Contact Lens Rule (CLR),[59] implementing the Fairness to Contact Lens Consumers Act,[60] and FDA regulations regarding over-the-counter (OTC) hearing aids,[61] implementing certain provisions of the FDA Reauthorization Act of 2017 (FDARA).[62] We would welcome reporting from the FTC on the question of whether it has brought any cases to enforce the central prescription-release provision of the CLR, initially adopted in 2004. More broadly, study of the competitive effects of these regulations may be salutary, to the extent that it might inform proposals to amend the rules. Still, we recognize that enforcement of these regulations is a proper part of the congressional charges to the agencies, and we do not propose changes to either rule.
The prospect of new competition regulations seems, at best, premature. First, the agencies may lack the authority to promulgate such competition rules. The question of whether Congress has granted the FTC substantive or “legislative” competition-rulemaking authority is contentious;[63] and we are aware of no legal basis on which the DOJ could adopt substantive competition regulations. We also are unaware of any amenable statutory charge to HHS. Certainly, HHS can and should consider competitive effects when implementing health-care statutes, but statutory charges for health-care regulations to HHS tend to be specific ones—as was the charge to promulgate regulations for OTC hearing aids noted in the preceding paragraph—and not commonly related to merger scrutiny.
Cognizant of the agencies’ substantial enforcement experience and a significant body of academic literature regarding health-care consolidation, it is difficult to imagine how submissions to the RFI could establish the prerequisites to competition rulemaking regarding health-care acquisitions, even if FTC were deemed to have the requisite rulemaking authority. At present, the agencies do not enforce any such health-care regulations and, to the best of our knowledge, none of the agencies has ever adopted a rule regarding health-care acquisitions under a general grant of legislative rulemaking authority. Specific health-care acquisitions, whether proposed or consummated, can, of course, be blocked, if found anticompetitive, under an administrative ruling, by the Federal Trade Commission, or a judicial ruling, by a federal court. To the best of our knowledge, such decisions have always been case-specific.
Contemporary antitrust law reserves broad rule-like prohibitions for a very limited number of “naked” restraints on trade, such as horizontal price-fixing. For more than 40 years, the U.S. Supreme Court has been clear that general, per se, prohibitions are reserved for the types of matters that “always or almost always tend to restrict competition and decrease output.”[64] None of the types of acquisitions listed in the RFI can demonstrably meet that standard and, absent an express statutory charge from Congress, there is no evident ground for regulating categories of health-care acquisitions under a lesser standard.
Again, we do not—and cannot—impugn ex ante competition concerns that may be raised by specific health-care acquisitions. But, for example, a given study suggesting that certain private-equity acquisitions of hospitals are associated with poorer quality in-patient care, at least on certain measures (chiefly, falls and central-line infections for Medicare beneficiaries)[65] may indeed inform merger scrutiny, but such average effects from a single noncausal study,[66] driven by select effects in a select patient population, cannot suffice to establish that such acquisitions are anticompetitive on net, on average, much less that they “always or almost always tend to restrict competition and reduce output.”
Of course, by noting the potential for new regulations, the agencies might contemplate not only—or even primarily—the promulgation of regulations sui generis, but research and advocacy reported to lawmakers that could inform subsequent and specific statutory charges for regulations.[67] Such research and advocacy can indeed have a salutary effect on policy, although, again, we caution that the present RFI seems unlikely to lead to well-founded policy recommendations, even if it does advance agency learning at the margin.
The RFI raises broad questions about vertical acquisitions, both in questioning the impact of “[t]ransactions conducted by private equity funds or other alternative asset managers,”[68] (some of which might be considered conglomerate mergers) and in questioning the impact of “[t]ransactions conducted by health systems.”[69]
There is no doubt that vertical mergers can be anticompetitive under certain circumstances. For example, an integrated firm may have an incentive to exclude rivals,[70] and a vertical merger can have an anticompetitive effect if the upstream firm has market power and the ability, post-acquisition, to foreclose its competitors’ access to a key input.[71] In that regard, raising rivals’ costs can “represent[] a credible theory of economic harm” if other conditions of exclusionary conduct are met.”[72] But the implications of vertical mergers are theoretically ambiguous: anticompetitive effects are possible, but they are neither necessary nor, for that matter, typical: “The circumstances… in which [raising rivals’ costs] can occur are usually so limited that [it] almost always represents a minimal threat to competition.”[73] Moreover:
[a] major difficulty in relying principally on theory to guide vertical enforcement policy is that the conditions necessary for vertical restraints to harm welfare generally are the same conditions under which the practices increase consumer welfare.[74]
This structural ambiguity weighs against any presumption against vertical mergers, and it suggests the importance of empirical research in formulating standards to evaluate vertical transactions.
The economics literature is, to borrow a phrase from Leegin, “replete with procompetitive justifications” for vertical integration. Vertical integration typically confers benefits, such as eliminating double marginalization,[75] increasing R&D investment,[76] and creating operational and transactional efficiencies.[77]
Empirical evidence further supports the established legal distinctions between horizontal mergers and vertical mergers (as well as other forms of vertical integration), indicating that vertical integration tends to be procompetitive or benign. For example, a meta-analysis of more than 70 studies of vertical transactions analyzed groups of studies for their implications for various theories or models of vertical integration, and for the effects of vertical integration. From that analysis:
a fairly clear empirical picture emerges. The data appear to be telling us that efficiency considerations overwhelm anticompetitive motives in most contexts. Furthermore, even when we limit attention to natural monopolies or tight oligopolies, the evidence of anticompetitive harm is not strong.[78]
On the contrary, “under most circumstances, profit-maximizing vertical integration decisions are efficient, not just from the firms’ but also from the consumers’ points of view.”[79] And “[a]lthough there are isolated studies that contradict this claim, the vast majority support it….”[80] Lafontaine & Slade accordingly concluded that “faced with a vertical arrangement, the burden of evidence should be placed on competition authorities to demonstrate that that arrangement is harmful before the practice is attacked.”[81] Another study of vertical restraints finds that, “[e]mpirically, vertical restraints appear to reduce price and/or increase output. Thus, absent a good natural experiment to evaluate a particular restraint’s effect, an optimal policy places a heavy burden on plaintiffs to show that a restraint is anticompetitive.”[82]
Subsequent research has reinforced these findings. Reviewing the more recent literature from 2009-18, John Yun concluded “the weight of the empirical evidence continues to support the proposition that vertical mergers are less likely to generate competitive concerns than horizontal ones.”[83]
Leading contributors to the empirical literature, reviewing both new studies and critiques of the established view of vertical mergers, maintain a consistent view. For example, testifying at a 2018 FTC hearing, former FTC Bureau of Economics Director Francine Lafontaine acknowledged that some of the early empirical evidence is less than ideal, in terms of data and methods, but reinforced the overall conclusions of her earlier research “that the empirical literature reveals consistent evidence of efficiencies associated with the use of vertical restraints (when chosen by market participants) and, similarly, with vertical integration decisions.”[84]
The empirical literature regarding vertical acquisitions involving health-care providers, specifically, remains unclear.[85] One study of hospital acquisitions of large physician groups, employing Medicare claims data, finds significant changes at the physician level, with acquired physicians delivering substantially more care in the acquirers’ hospitals post-acquisition (and less at other hospitals and via office-based care).[86] It also finds increased billing at the hospital level, although observed hospital-level effects are smaller, and estimates less precise, than those at the physician level.[87] Here, increased costs—at least for these acquisitions on these measures—appear to be “consistent with the hypothesis that acquired physicians are responding to CMS’ location-based billing policy, which provides higher compensation for care delivered in hospital settings relative to doctors’ offices.”[88] Another study fails to find systematic clinical benefits to vertical integration across diverse quality-of-care metrics.[89]
Such studies may tend to impugn the notion that vertical acquisitions of physician practices by hospitals tend to provide efficiencies that offset cost or price increases, but they cannot be regarded as comprehensive. Further, they suggest the role that public health-care programs and regulations may play in distorting competitive dynamics for both utilization and costs. That raises the question of where policy reform might best be located, supposing that it is called for.
Finally, such studies do not resolve the larger question of why so many physicians—both individually and through their practice groups—are leaving independent practice for hospital- and system-based employment. While the extant literature can certainly inform provider-merger scrutiny in individual matters, it does not appear to implicate general policy reforms for vertical acquisitions of health-care providers and, indeed, suggests equal concern with the design of federal programs and regulations beyond antitrust.
In short, empirical research confirms that the law properly does not presume that vertical mergers have anticompetitive effects; rather, it requires specific evidence of both harms and efficiencies.
The preceding comments apply a fortiori to conglomerate mergers. Whereas vertical mergers combine firms in the same supply chain, conglomerate mergers combine firms that are neither engaged in head-to-head competition nor operating in the same supply chain. Such mergers thus do not inherently reduce competition in any market. The government has explained that conglomerate mergers can produce many of the same “procompetitive benefits” of vertical mergers if the combined firms’ “production or distribution uses the same assets, inputs, or know-how.”[90] That is so “even if the merged firm will become a more effective competitor or gain [market] share.”[91] The resulting economies of scope can increase consumer welfare.
Conglomerate mergers between large, established firms and smaller innovators also play an important role in fostering innovation—and, thus, product competition—in, for example, the pharmaceutical industry. As the Congressional Budget Office (CBO) explains:
The acquisition of a small company by a larger one can create efficiencies that might increase the combined value of the firms by allowing drug companies of different sizes…to specialize in activities in which they have a comparative advantage. Small companies—with relatively fewer administrative staff, less expertise in conducting clinical trials, and less physical and financial capital to manage—can concentrate primarily on research. For their part, large drug companies are much better capitalized and can more easily finance and manage clinical trials. They also have readier access to markets through established drug distribution networks and relationships with buyers.[92]
Conglomerate mergers in the pharmaceutical industry thus can realize the procompetitive effects of vertical combinations (creating efficiencies) while avoiding the anticompetitive effects of horizontal mergers (eliminating competition).
That is not to say conglomerate mergers can never lead to higher prices. Recent research on bargaining models indicates it is possible for cross-market acquisitions to facilitate a price increase. Such models do not, however, suggest that is a likely result. Instead, empirical research indicates that, generally, “cross-market acquisitions by larger companies do not have a significant effect on price.”[93] Moreover, a common theory of competitive harm holds only “as long as” the parties’ “products have common customers.”[94] Hospital acquisitions may provide a special case, in that they may cross geographic markets even if they do not cross product markets. Moreover, geographic markets may have different boundaries from the perspectives of patients and third-party payors.[95] Put another way, certain provider mergers that may be deemed cross-market transactions from a patient perspective may also alter provider bargaining with health plans for whom the providers are substitutes (or complements); hence, from another perspective, they are within the same geographic market. In that regard, additional research[96] and additional enforcement experience may, in time, lead to further refinements in hospital-merger scrutiny.
Of course, none of this is to say that the agencies should not scrutinize vertical or conglomerate mergers involving health-care providers. Further research might sharpen the agencies’ understanding of specific industries in which, or circumstances under which, provider acquisitions may be more or less likely to raise competitive concerns. Ongoing research by the agencies—including BE staff research[97]—will no doubt further that goal.
But, as we note above, a single study is not a body of literature, much less one that is mature or settled. Indeed, a single study suggesting that certain private-equity acquisitions of hospitals are associated with poorer quality in-patient care, at least on certain measures (chiefly, falls and central-line infections for Medicare beneficiaries)[98] may, indeed, inform merger scrutiny, but such average effects from a single noncausal study, driven by select effects in a select patient population, cannot suffice to establish that such acquisitions are anticompetitive on net, on average, much less that they “always or almost always tend to restrict competition and reduce output.” More plausibly, it may be pertinent to questions of, e.g., when to issue a second request or commence a formal investigation, at least at the margin.
Similarly, future research may sharpen the agencies’ understanding of the conditions under which vertical (or conglomerate) acquisitions by third-party payors are more, or less, likely to raise competition concerns. Such research might be bolstered by additional enforcement experience with such acquisitions, but we expect that the present RFI is not well-designed to further agency understanding much beyond that already available to agency staff.
As noted above, we were struck by a statement at the outset of the RFI: “Given recent trends, we are concerned that transactions may generate profits for those firms at the expense of patients’ health, workers’ safety, and affordable health care for patients and taxpayers.”[99] To be sure, some transactions do just that. There is no doubt that the antitrust laws are broadly applicable to health-care transactions or that particular provider mergers, under particular facts and circumstances, may violate the antitrust laws, harming competition and consumer welfare.[100] And nonprice effects, such as quality of care, may factor in antitrust scrutiny of a provider merger.[101]
Nonetheless, the agencies understand that antitrust law and economics do not recognize any general or fundamental tension between firm profits, on the one hand, and the consumer benefits typically associated with price and nonprice competition in goods and services markets, on the other. Moreover, considerable research militates against the suggestion that for-profit and not-for-profit providers should be distinguished for the purposes of merger scrutiny. As Martin Gaynor—former director of the FTC Bureau of Economics and presently special advisor to the assistant U.S. attorney general for antitrust—summarized in testimony before the Senate Judiciary Committee: “Research evidence shows not-for-profit hospitals exploit market power just as much as for-profits.”[102]
In fact, as noted above, two early foci for the FTC’s hospital-merger retrospective studies were, one, the question of how best to approach geographic-market definition (not least, because some courts were inclined toward very broadly drawn hospital markets, at odds with established methods) and, two, the question of whether not-for-profit hospitals were less likely than for-profit hospitals to exploit market power, when they had it, within the relevant geographic boundaries (not least, because some courts were accepting what amounted to a “not-for-profit defense” to hospital-merger challenges).[103] The merger retrospectives consistently demonstrated that not-for-profit status did not make a difference.[104]
Our point is not that the extant literature is definitive or that it is easily generalized across different types of providers. Rather, there are good reasons to think that not-for-profit providers are not special from a competition standpoint, and substantial evidence on that point in a well-investigated provider domain.
Further research and enforcement experience might suggest a different perspective on one or more specific subcategories of provider acquisitions. Still, the agencies should be mindful of the hospital findings as a background matter. And as the agencies’ research staff are likely aware, research regarding the question of whether for-profit provider status in, e.g., hemodialysis treatment is associated with different treatment quality has provided mixed results, with some agency research failing to find any statistically significant indication that it is.[105] Results also are observed to vary across empirical specifications and available datasets.[106] In addition, given the large number of hemodialysis acquisitions nationwide associated with two acquiring firms, there is an open question, even with regard to kidney dialysis, how best to parse for-profit status from the management practices of two very large for-profit acquirers.[107]
Whereas some of the interests or concerns in the RFI focus on transactions’ structural features—e.g., on the competitive effects of horizontal, vertical, or conglomerate mergers—an overlapping set of questions focuses on the type of acquiring firm. For example, the RFI notes “concerning trends” in, e.g., “transactions in the health care market conducted by private equity funds or other alternative asset managers, health systems, and private payers .”[108] The RFI suggests that there is “recent research indicating these categories of transactions may harm health care quality, access, and/or costs.”[109]
But the suggestion about “recent research” has no attached citation. An earlier footnote substantiates the claim that “[a]cademic research and agency experience in enforcement actions has shown that patients, health care workers, and others may suffer negative consequences as a result of horizontal and vertical consolidation of a range of different types of providers—including not-for-profit providers.”[110] While the agencies cite only two primary research articles and one policy review for that general proposition—and while one of the articles suggests limited results[111]—we take it that the far more general claim is (or should be) uncontroversial. The dozens of papers cited above in Section II.A.2. of these comments tend to substantiate those broad claims. That is, diverse provider acquisitions can raise competitive concerns; and, moreover, competitive concerns can be raised equally by transactions (or other conduct) involving not-for-profit and for-profit providers.
Not incidentally, many provider markets are highly concentrated, pre-acquisition, on any notion of “highly concentrated.”[112] For example, the FTC’s defense of its authority in the Phoebe-Putney matter concerned what was, in effect, a merger to monopoly;[113] and several surrounding counties—like many outside metropolitan areas across the country—had no general hospital at all.[114] No policy reform is needed to provide that two-to-one hospital mergers will be carefully scrutinized by antitrust authorities. Similarly high provider concentration can be observed across diverse specialty practices in many rural and other small markets.[115]
But the research base and enforcement experience regarding specific types of acquiring (or target) firms is considerably less well-developed. We do not mean to impugn specific studies, so much as to place available results in context. For example, as we also discuss above, there are studies suggesting negative health-care-quality effects—cognizable harms—associated with certain for-profit acquisitions of hemodialysis-treatment facilities.[116] But as we note there, results in that space are somewhat mixed, varying across empirical specifications and available data, and there is some research that fails to find any statistically significant indication that acquisitions by for-profit firms are associated with different treatment quality.[117]
Turning to private-equity acquisitions, the RFI cites a single study suggesting that certain private-equity acquisitions of hospitals are associated with poorer quality in-patient care, at least on certain measures (chiefly, falls and central-line infections for Medicare beneficiaries).[118] We cannot gainsay competition concerns about such acquisitions, and the study may, indeed, inform merger scrutiny going forward. Such average effects from a single non-causal study, driven by select effects in a select patient population, cannot, however, suffice to establish that such acquisitions are anticompetitive on net, on average, much less ground a fundamentally different approach to private-equity acquisitions of health-care providers. We note, too, that another study (with two of the same coauthors) found more mixed results, including some suggesting improved quality of care:
In our main analysis, we observed greater improvements in process quality measures among private equity–acquired hospitals relative to controls, which may reflect better care for patients. However, it could also be consistent with better adherence to compliance standards or efforts to maximize opportunities for quality bonuses under pay-for-performance contracts.[119]
Positive income and profitability were also observed. Both studies evidence some heterogeneity of findings across the private-equity and control hospitals. Our point is not that the agencies should be unconcerned about nonprice effects, such as quality of care. Rather, it is that the understanding of this class of transactions is incomplete, and unlikely to be resolved by submissions in response to this RFI. Also, the research does not resolve the fundamental question of when or under what conditions hospitals may be targets for private-equity acquisitions. And to the extent it suggests new management practices, it may suggest not just concerns but tradeoffs in the management capacity associated with different acquirers.[120]
Given mixed results and a lacunae in the literature, further research is warranted, as well as case-specific investigation using established methods. To the extent that specific findings on specific categories of provider mergers are mixed, unclear, or conspicuously limited, more general economic learning and precedent regarding, e.g., horizontal, vertical, and conglomerate mergers may be especially informative. So, too, may be agency experience with undue restraints on the “corporate practice of medicine” or other undue restraints on new models of distribution for health care, dating at least to the FTC’s landmark 1980 case against the American Medical Association, which addressed various restraints on physician and nonphysician contracting.[121] Analogously, in 1992, based on its research regarding the eye-care industry, FTC staff advocated for the repeal of “prohibitions against practicing in retail settings and against corporate affiliations.”[122]
Finally, given results suggesting the confounding effects of health-care programs and regulations, from Medicare reimbursement policies to state-based certificate-of-public-advantage and certificate-of-need regulations, the agencies should be ever alert to the question of the best locus for policy reform.
As we explain above, we appreciate the importance of the agencies’ efforts to protect and foster competition in diverse health-care markets; and we appreciate the mutually reinforcing roles that policy studies and enforcement experience can play in health-care and antitrust policy. Still, one need not gainsay concerns about health-care competition or specific types of acquisitions to appreciate the difficulty of grounded, systematic reform of enforcement policy in these areas. The agencies’ extension of the deadline for submissions in response to the RFI will, no doubt, increase the utility of the inquiry. But while recognizing that the present RFI may be a useful endeavor, it is just one tool—in itself, a limited one—in the agencies “policy R&D”[123] toolbox. Moreover, the RFI’s framing seems, in many ways, unfortunate: not conducive to the most constructive use of agency resources or third-party contributions.
First, the scope of the RFI is unclear. The agencies note that they are:
particularly interested in information on transactions in the health care market conducted by private equity funds or other alternative asset managers, health systems, and private payers, especially those transactions that would not be noticed to the Department of Justice and the Federal Trade Commission under the Hart-Scott-Rodino Antitrust Improvements Act, 15 USC 18(a).[124]
Such transactions may be both numerous and diverse, with or without a restriction on HSR-reportable transactions. The scope and heterogeneity of agency interests is only underscored by the RFI’s elaboration on the transactions of interest:
These transactions could involve dialysis clinics, nursing homes, hospice providers, primary care providers, hospitals, home health agencies, home- and community-based services providers, behavioral health providers, billing and collections services, revenue cycle management services, support for value-based care, data/analytics services, and other types of health care payers, providers, facilities, Pharmacy Benefit Managers (PBMs), Group Purchasing Organizations (GPOs), or ancillary products or services.[125]
If the RFI is meant to be but one inquiry in a much larger project—say, for example, something akin to the 2003 FTC/DOJ health-care hearings that led to the 2024 Dose of Competition report—some sense of the scope of the larger project would be helpful to the public. On its own, the reference to acquisitions across such diverse health-care entities seems extremely broad, and not well-suited to the production of usefully focused submissions.
Whatever the scope of the RFI, its framing is critical to its utility. Given the agencies’ considerable contributions to health-care competition over the course of several decades,[126] we regret to comment on a conspicuous deficit in the RFI’s framing. As we note in our introductory summary, the agencies’ RFI seems, at times, to prejudge the answers to its own questions. That may be unproductive for research purposes and, specifically, may bias submissions to the public record.
The most egregious example of this may be the FTC’s press release announcing the RFI, which informed both the press and stakeholders that the FTC, DOJ, and HHS “Launch Cross-Government Inquiry on Impact of Corporate Greed in Health Care.”[127] That framing would seem overly dramatic if it announced allegations of antitrust violations; it seems an especially poor way to announce a request for information from the diverse stakeholders constituting “the public.”
Of course, a press release is just that, but the language is repeated in the FTC’s May 1 announcement that the agencies had extended the RFI comment period;[128] and at least some readers may have noticed that the language in the FTC’s press release mirrors that of a White House “fact sheet” noting that the administration was “[l]aunching a cross-government public inquiry into corporate greed in health care.”[129] Some individuals may be “greedy,” in a colloquial sense, whether in their personal capacities or acting as corporate agents. But “corporate greed” has no clear meaning in antitrust law or industrial-organization economics. It is hardly a subject for systematic investigation by expert agencies; it seems, at best, an atmospheric distraction.
Announcements of the RFI from DOJ and HHS seem similarly, if less steeply, slanted, describing a “cross-government public inquiry into private-equity and other corporations’ increasing control over health care.”[130] Identifying legitimate competition concerns is not, in itself, problematic. But suggesting such concerns about broad categories of transactions, without any acknowledgment of potential merger benefits, and without any acknowledgment that most provider mergers and acquisitions are not challenged, much less blocked, and should be presumed lawful until established otherwise, seems to suggest a general hostility to provider acquisitions with no basis in legal precedent, economic research, or agency practice. Similarly, any suggestion that profits in highly differentiated product and service markets are inconsistent with the fruits of vigorous health-care competition—lower prices, higher quality, and greater availability of health care—would appear fundamentally at odds with both established antitrust law and economic learning.
Similarly, as we note above, we were struck by a statement at the outset of the RFI itself: “Given recent trends, we are concerned that transactions may generate profits for those firms at the expense of patients’ health, workers’ safety, and affordable health care for patients and taxpayers.”[131] To be sure, some transactions do just that. But, as we discuss at some length above,[132] antitrust law and economics do not recognize any general or fundamental tension between firm profits, on the one hand, and the consumer benefits typically associated with price and nonprice competition in goods and services markets, on the other.
And while there is some research suggesting that some categories of for-profit provider acquisitions may be associated with competitive harms, at least in some circumstances, a considerable body of research, reinforced by agency-enforcement experience, militates against the suggestion that for-profit and not-for-profit providers should be distinguished for the purposes of merger scrutiny. As Martin Gaynor—former director of the FTC Bureau of Economics and presently special advisor to the assistant U.S. attorney general for antitrust—summarized in testimony before the Senate Judiciary Committee: “Research evidence shows not-for-profit hospitals exploit market power just as much as for-profits.”[133]
We wonder, too, about the design of a March 5, 2024, workshop titled “Private Capital, Public Impact: An FTC Workshop on Private Equity in Health Care,”[134] which was hosted by the FTC with leadership from the DOJ and HHS also participating. The workshop was timed to coincide with the RFI and, not incidentally, was noted identically by all three agencies in their press releases for the RFI.[135] The posted agenda specifies a brief event—less than half a day—at which roughly half of the participants represented the agencies themselves, and none obviously worked in or for the industry in question or, e.g., for large health plans or other private payors. Several participants were individual practitioners relating their own perceptions of specific acquisitions.[136]
To be sure, providers and other stakeholders might well be interested in the perspectives of agency officials. At the same time, the airing of agency views and concerns seems ill-timed, given the timing of the RFI itself, as submissions in response to the RFI were initially due just one day after the workshop.
Moreover, the FTC’s announcement of its workshop echoes the apparent imbalance of the RFI itself:
In recent years, the Commission has become increasingly concerned about the effects of private equity investment in this sector. We are convening a workshop bringing together experts and affected individuals to discuss their insights. The workshop will consist of several panels and feature remarks from government officials, academics, economists, and practitioners, as well as members of the public who have experienced, first-hand, the effects of private equity investment in the health care system.[137]
Again, we do not take any issue with the identification of legitimate competition concerns. Merger scrutiny is the proper purview and, indeed, obligation of the antitrust agencies; and we do not write to opine on open matters or potential acquisitions. But the workshop design, description, and timing suggest an information-gathering exercise distinct from an open-minded public inquiry, if not the prejudgment of myriad fact-dependent potential enforcement matters.
Health-care-provider consolidation is an important area of concern for antitrust enforcers, and there is no doubt that specific provider acquisitions can prove anticompetitive. For those reasons, the RFI may indeed prompt the submission of useful materials to the antitrust agencies and, perhaps, to HHS. To the extent that the RFI is considered but one more step in the agencies’ ongoing competition R&D program, it may be salutary. At the same time, the RFI does not seem designed to move agency learning much beyond the margin—certainly not across the broad swath of issues it raises; and the RFI’s framing seems likely to skew, rather than focus, the information submitted.
Further, while competition concerns may be important to how the agencies implement various congressional charges to promulgate specific regulations (and, by statute, are implicated in any FTC rulemaking regarding unfair or deceptive acts or practices), neither enforcement experience nor economic literature militate in favor of new competition regulations regarding provider mergers and acquisitions.
While there may be ample reasons for diverse competitive concerns, such concerns do not establish categories of acquisitions that warrant per se condemnation, via regulation or otherwise. To the contrary, agency experience and expertise with, e.g., restraints on the “corporate practice of medicine” and with other regulatory restraints on diverse methods or models of health-care delivery illustrate the competitive (and welfare) tradeoffs implicated by many types of provider acquisitions and, indeed, by specific transactions. Such tradeoffs can have—and have had—directionally different competition implications on a case-by-case basis.
More specifically, while extant research and enforcement experience may identify or heighten competitive concerns about certain transactions, they militate against, rather than for, new policies regarding for-profit providers, overly simple structural approaches to health-care-merger screening, and the conflation of considerations for horizontal, vertical, and conglomerate acquisitions.
Emerging concerns may prompt reallocation of screening resources and priorities within the agencies, although the importance of building experience cumulatively may suggest caution there, too.
As a related matter, concerns about provider acquisitions—single transactions or clusters of them—below the HSR reporting threshold may be justified in many markets, especially in rural or other underserved areas. That suggests a complex of inquiries, however, and not new rules or general policies. Given the myriad factors driving consolidation—especially in small (and, often, shrinking) markets—and given the fact that the large majority of mergers, above or below the threshold, are not anticompetitive, how can further research and enforcement experience identify filters by which the agencies might identify and screen those sub-threshold acquisitions most likely to raise competitive concerns?
Finally, as we suggest in the introduction to these comments, further policy inquiries—from RFIs to workshops to systematic research—might best be served by agency economists conducting a serious critical synthesis of the extant body of research regarding health-care-provider acquisitions. That is a nontrivial project, but it should be prologue to consideration of or recommendations regarding policy reforms in the area.
[1] Request for Information on Consolidation in Health Care Markets, Docket No. ATR-102, Dep’t Justice, Dep’t Health & Human Servs., & Fed. Trade Comm’n (Mar. 5, 2024), https://www.regulations.gov/docket/FTC-2024-0022 [hereinafter “RFI”].
[2] Daniel J. Gilman & Tara Isa Koslov, Policy Perspectives: Competition and the Regulation of Advanced Practice Nurses, Fed. Trade Comm’n, 1 (Mar. 2014), available at https://www.ftc.gov/system/files/documents/reports/policy-perspectives-competition-regulation-advanced-practice-nurses/140307aprnpolicypaper.pdf.
[3] For an overview, see, e.g., Hearing on Antitrust Applied: Hospital Consolidation Concerns and Solutions, Testimony before the Subcomm. on Competition Pol’y, Antitrust, and Consumer Rights, S. Comm. on the Judiciary, 117th Cong. (2021) (statement of Martin Gaynor, E.J. Barone University Professor of Economics and Public Policy Heinz College, Carnegie Mellon University), https://www.judiciary.senate.gov/download/martin-gaynor-testimony.
[4] For successful cases against provider mergers, see, e.g., Fed. Trade Comm’n v. Hackensack Meridian Health, Inc., 30 F.4th 160 (3d Cir. 2022); ProMedica Health Sys., Inc., FTC Docket No. 9346, 2012 WL 2450574 (Jun. 25, 2012), aff’d, ProMedica Health Sys., Inc., v. FTC, 749 F.3d 559 (6th Cir. 2014); FTC v. Penn State Hershey Med. Ctr., 185 F. Supp. 3d 552 (M.D. Pa. 2016), rev’d, 838 F.3d 327, 343 (3d Cir. 2016); Saint Alphonsus Med. Ctr.-Nampa Inc. v. St. Luke’s Health Sys., Ltd., No. 1:12-cv-00560, 2014 WL 407446 (D. Idaho Jan. 24, 2014), aff’d, 778 F.3d 775 (9th Cir. 2015). Regarding the authority to review provider mergers, see Fed. Trade Comm’n v. Phoebe Putney Health Sys., Inc., 586 U.S. 216 (2013) (acquisition not immune from scrutiny under state-action doctrine).
[5] We refer to the Sherman and Clayton Acts and, by extension, the Federal Trade Commission Act, and recognize that other parties, including state attorneys general and private parties, may sue to enforce certain provisions of the antitrust laws, while recognizing that there is no private right of action under the FTC Act.
[6] 15 U.S.C. § 46. See infra., text accompanying notes 23-31, for constructive examples.
[7] Id. at § 46(l).
[8] Links to economic research, including reports, working papers, issue papers, and articles in peer-reviewed journals can be found at Fed. Trade Comm’n, Bureau of Econ., Research in the Bureau of Economics, https://www.ftc.gov/about-ftc/bureaus-offices/bureau-economics/research-bureau-economics. See also infra. Section II.A.2.
[9] RFI at 11.
[10] Sub-threshold acquisitions may well be 3-to-2 or merger-to-monopoly transactions for critical services. “Any standard” would include, for example, those described in any or all editions of the horizontal merger guidelines.
[11] We note that, e.g., in January 2021, the FTC issued orders, under its FTC Act Section 6(b) authority to six health-insurance companies to provide information to facilitate the agency’s study of the effects of physician group and health-care-facility consolidation from 2015 through 2020. See Press Release, FTC to Study the Impact of Physician Group and Healthcare Facility Mergers, Fed. Trade Comm’n (Jan. 14, 2021), https://www.ftc.gov/news-events/news/press-releases/2021/01/ftc-study-impact-physician-group-healthcare-facility-mergers. While the information collected under such orders is limited partly by restrictions imposed under the Paperwork Reduction Act, and not merely available data and methodological concerns, it may nonetheless help advance understanding of provider consolidation. We assume that this project, initiated at the tail end of the last administration, is ongoing.
[12] AMA v FTC, 638 F.2d 443 (2d Cir. 1980).
[13] Id. at 1.
[14] See generally, e.g., Fed. Trade Comm’n v. Phoebe Putney Health Sys., Inc., 568 U.S. 216 (2013). In its unanimous decision, the Court noted that the 11th U.S. Circuit Court of Appeals had, as an initial matter, “‘agreed with the [FTC] that, on the facts alleged, the joint operation of Memorial and Palmyra would substantially lessen competition or tend to create, if not create, a monopoly’” 568 U.S. at 222-3 (quoting Fed. Trade Comm’n v. Phoebe Putney Health Sys., Inc., 663 F.3d 1369, 1375 (2011). The Court’s holding in Phoebe Putney upheld the FTC’s jurisdiction over the hospital merger, notwithstanding the grant of certain powers to hospital authorities by the state of Georgia. 568 U.S. at 224. For a discussion of various FTC research, advocacy, and enforcement activities in health care, including scrutiny of provider mergers, see, e.g., Maureen K. Ohlhausen, The First Wealth is Health: Protecting Competition in Healthcare Markets, Remarks at the 2017 ABA Fall Forum (Nov. 16, 2017), available at https://www.ftc.gov/system/files/documents/public_statements/1275573/mko_fall_forum_2017.pdf. Although the FTC and the DOJ have concurrent jurisdiction over mergers under Section 7 of the Clayton Act, health-care-provider mergers are typically assigned to the FTC under the FTC/DOJ clearance process. For a list of health-care-enforcement matters, see FTC, The FTC’s Health Care Work: Cases, https://www.ftc.gov/news-events/topics/competition-enforcement/health-care-competition (last accessed May 1, 2024).
[15] See infra. Section II.D.
[16] Private Capital, Public Impact: An FTC Workshop on Private Equity in Health Care, Fed. Trade Comm’n (May 5, 2024), https://www.ftc.gov/news-events/events/2024/03/private-capital-public-impact-ftc-workshop-private-equity-health-care. The workshop webpage includes a description, along with links to the agenda, participant biographies, and a transcript of the proceedings.
[17] Press Release, Federal Trade Commission, the Department of Justice and the Department of Health and Human Services Launch Cross-Government Inquiry on Impact of Corporate Greed in Health Care, Fed. Trade Comm’n (Mar. 5, 2024), https://www.ftc.gov/news-events/news/press-releases/2024/03/federal-trade-commission-department-justice-department-health-human-services-launch-cross-government (noting that, “[i]n addition to the launch of the RFI, all three agencies will also be participating today in a virtual public workshop that will explore the impact of private equity in health care and will discuss what the government is doing to address any harmful effects.”). The announcement of the FTC workshop was repeated verbatim in DOJ and HHS announcements of the RFI. Press Release, Justice Department, Federal Trade Commission and Department of Health and Human Services Issue Request for Public Input as Part of Inquiry into Impacts of Corporate Ownership Trend in Health Care, Dep’t Justice (Mar. 5, 2024), https://www.justice.gov/opa/pr/justice-department-federal-trade-commission-and-department-health-and-human-services-issue; Press Release, HHS, DOJ, and FTC Issue Request for Public Input as Part of Inquiry into Impacts of Corporate Ownership Trend in Health Care, Dep’t Health & Human Servs. (Mar. 5, 2024), https://www.hhs.gov/about/news/2024/03/05/issue-request-for-public-input-as-part-of-inquiry-into-impacts-of-corporate-ownership-trend-in-health-care.html.
[18] William e. Kovacic, The Federal Trade Commission at 100: Into Our Second Century, 91-92 (Jan. 2009), available at https://www.ftc.gov/sites/default/files/documents/public_statements/federal-trade-commission-100-our-second-century/ftc100rpt.pdf.
[19] Public Hearings: Health Care and Competition Law and Policy Hearings, Fed. Trade Comm’n & Dep’t Justice (2023), https://www.ftc.gov/news-events/events/2003/02/health-care-competition-law-policy-hearings (hearings page with links to agendas and transcripts); Hearings on Competition and Consumer Protection in the 21st Century, Fed. Trade Comm’n (2018-19), https://www.ftc.gov/enforcement-policy/hearings-competition-consumer-protection (hearings page with links to agendas, transcripts, and submissions).
[20] See, e.g., Now Hear This: Competition, Innovation, and Consumer Protection Issues in Hearing Health Care, Fed. Trade Comm’n (Apr. 18, 2017), https://www.ftc.gov/news-events/events/2017/04/now-hear-competition-innovation-consumer-protection-issues-hearing-health-care (FTC Workshop); Examining Health Care Competition, Fed. Trade Comm’n (Mar. 2014), https://www.ftc.gov/news-events/events/2014/03/examining-health-care-competition (FTC Workshop); Innovations in Health Care Delivery, Fed. Trade Comm’n (Apr. 24, 2008), https://www.ftc.gov/news-events/events/2008/04/innovations-health-care-delivery (FTC Workshop).
[21] See, e.g., 16th Annual Microeconomics Conf., Fed. Trade Comm’n (Nov. 2023), https://www.ftc.gov/news-events/events/2023/11/sixteenth-annual-microeconomics-conference (annual conference hosted by FTC Bureau of Economics; 2023 conference was cosponsored by FTC and Tobin Ctr., Yale Univ.).
[22] See, e.g., RFI; FTC Seeks Comment on Contact Lens Rule Review, 16 CFR Part 315, Fed. Trade Comm’n (May 28, 2019), https://www.regulations.gov/document/FTC-2019-0041-0001.
[23] Public Hearings: Health Care and Competition Law and Policy, Dep’t Justice (last updated Aug. 21, 2023), https://www.justice.gov/archives/atr/event/public-hearings-health-care-and-competition-law-and-policy (describing hearings jointly conducted by DOJ and FTC, and providing links to agendas and transcripts for individual hearings, submissions to the public record, and various supporting materials).
[24] Fed. Trade Comm’n & U.S. Dep’t of Justice (“DOJ”), Improving Health Care: A Dose of Competition (2004), available at https://www.ftc.gov/sites/default/files/documents/reports/improving-health-care-dose-competition-report-federal-trade-commission-and-department-justice/040723healthcarerpt.pdf.
[25] Id. at exec. summ., 20-29.
[26] Innovations in Health Care Delivery (workshop), Fed. Trade Comm’n (Apr. 24, 2008), https://www.ftc.gov/news-events/events/2008/04/innovations-health-care-delivery.
[27] The workshop agenda is available at https://www.ftc.gov/sites/default/files/documents/public_events/innovations-health-care-delivery/agenda-5.pdf.
[28] Examining Health Care Competition (workshop), Fed. Trade Comm’n (Mar. 2014), https://www.ftc.gov/news-events/events/2014/03/examining-health-care-competition.
[29] Examining Health Care Competition, Fed. Trade Comm’n & Dep’t Justice (Feb. 2015), https://www.ftc.gov/news-events/events/2015/02/examining-health-care-competition.
[30] Another Dose of Competition: Accountable Care Organizations and Antitrust, FTC Workshop (May 2011), https://www.ftc.gov/news-events/events/2011/05/another-dose-competition-accountable-care-organizations-antitrust.
[31] See, e.g., Statement of Antitrust Enforcement Policy Regarding Accountable Care Organizations Participating in the Medicare Shared Savings Program, 76 Fed. Reg. 67026 (Oct. 28, 2011), (Final Policy Statement, Fed. Trade Comm’n and Dep’t Justice Antitrust Div.).
[32] See, e.g., Devesh Raval et al., Using Disaster Induced Closures to Evaluate Discrete Choice Models of Hospital Demand, 53 RAND J. Econ. 561 (2022); Thomas Koch & Shawn W. Ulrick, Price Effects of a Merger: Evidence from a Physicians’ Market, 59 Econ. Inquiry 790 (2021); Keith Brand & Ted Rosenbaum, A Review of the Economic Literature on Cross-Market Healthcare Mergers, 82 Antitrust L.J. 533 (2019); Thomas Koch et al., Physician Market Structure, Patient Outcomes, and Spending: An Examination of Medicare Beneficiaries, 53 Health Servs. Res. 3549 (2018); Thomas G. Koch, Brett W. Wendling, & Nathan E. Wilson, How Vertical Integration Affects the Quantity and Cost of Care for Medicare Beneficiaries, 52 J. Health Econ. 19 (2017); Julie A. Carlson et al., Economics at the FTC: Physician Acquisitions, Standard Essential Patents, and Accuracy of Credit Reporting, 43 Rev. Indus. Org. 303 (2013); See also, e.g., Martin Gaynor & Robert J. Town, The Impact of Hospital Consolidation—Update, Robert Wood Johnson Foundation, The Synthesis Project (2012) (Gaynor is a former director of the FTC’s Bureau of Economics who serves presently as a special advisor to the assistant U.S. attorney general for antitrust); Martin Gaynor & William B. Vogt, Competition Among Hospitals, 34 RAND J. Econ. 764 (2003); Maximillian J. Pany, Michael E. Chernew, & Leemore S. Dafny, Regulating Hospital Prices Based on Market Concentration Is Likely to Leave High-Price Hospitals Unaffected, 40 Health Aff. 1386 (Sept. 2021) (Dafny was deputy director for health care antitrust in the FTC’s Bureau of Economics from 2012-13); Leemore S. Dafny, Hospital Industry Consolidation—Still More to Come?, 370 New Eng. J. Med. 198 (2014).
[33] We focus here on research associated with the FTC’s Bureau of Economics, which comprises a significant body of pertinent research. We recognize, of course, that diverse empirical research from DOJ economists and, indeed, various HHS agencies, may be pertinent to provide antitrust scrutiny as well. Stepping back, the larger and still-developing body of academic literature regarding health-care competition is considerable and complex. We do not attempt to review it here.
[34] See, e.g., Letter from Lina Khan, Chair, Fed. Trade Comm’n & Jonathan Kanter, Asst. Atty. General, Antitrust Div., Dept. Justice to the Hon. François-Philippe Champagne, Canada Ministry Innovation, Sci. & Indus. (Mar. 31, 2023), https://www.justice.gov/atr/page/file/1578296/dl?inline. See also id. at 3, n. 11 and 9, n. 40 (highlighting specific hospital-merger retrospective studies and merger retrospectives more generally).
[35] See, e.g., Michael A. Salinger, The 2023 Merger Guidelines and the Role or Economics, Rev. Indus. Org. (May 3, 2024), https://doi.org/10.1007/s11151-024-09957-x; see also, Prepared Opening Remarks of Chairman Joseph J. Simons, Hearings on Competition and Consumer Protection in the 21st Century, Merger Retrospectives, Fed. Trade Comm’n (Apr. 12, 2019), available at https://www.ftc.gov/system/files/documents/public_statements/1513555/merger_retrospectives_hearing_opening_remarks_chairman.pdf. Numerous injunctions obtained by the FTC in provider matters since commencement of the hospital-merger retrospective study program can be found at https://www.ftc.gov/legal-library/browse/cases-proceedings?search=hospital+clinic&sort_by=search_api_relevance.
[36] See, e.g., Thomas L. Greaney, Whither Antitrust? The Uncertain Future of Competition Law in Health Care, 21 Health Affs. 185 (2002); Christopher Garmon, Hospital Mergers—Retrospective Studies to Improve Prediction, CPI Antitrust Chronicle (Jul. 2017).
[37] Orly Ashenfelter, Daniel Hosken, Michael Vita, & Matthew Wienberg, Retrospective Analysis of Hospital Mergers, 18 Int. J. Econ. & Bus. 5, 6 (2011).
[38] Michael G. Vita & Seth Sacher, The Competitive Effects of Not?For?Profit Hospital Mergers: A Case Study, 49 J. Indus. Econ. 63 (2001).
[39] See, e.g., Christopher Garmon & Laura Kmitch, Hospital Mergers and Antitrust Immunity: The Acquisition of Palmyra Medical Center by Phoebe Putney Health, 14 J. Comp. L. & Econ. 433 (2018); Christopher Garmon, The Accuracy of Hospital Screening Methods, 48 RAND J. Econ. 1068 (2017) (reviewing post-merger price changes for 28 hospital mergers, initially published as BE Working Paper); Deborah Haas?Wilson & Christopher Garmon, Hospital Mergers and Competitive Effects: Two Retrospective Analyses, 18 Int. J. Econ. Bus. 17 (2011); Steven Tenn, The Price Effects of Hospital Mergers: A Case Study of the Sutter–Summit Transaction, 18 Int. J. Econ. Bus. 65 (2011) (originally published as BE Working Paper); Aileen Thompson, The Effect of Hospital Mergers on Inpatient Prices: A Case Study of the New Hanover-Cape Fear Transaction, 18 Int. J. Econ. Bus. 91 (2011) (originally published as BE Working Paper); Ashenfelter et al., supra note 37; Patrick S. Romano & David J. Balan, A Retrospective Analysis of the Clinical Quality Effects of the Acquisition of Highland Park Hospital by Evanston Northwestern Healthcare, 18 Int. J. Econ. Bus. 45 (2010); John Simpson, Geographic Markets in Hospital Mergers: A Case Study, 10 Int. J. Econ. Bus. 291 (2003); Vita & Sacher, supra note 38. A bibliography of merger-retrospective studies compiled by the Bureau of Economics comprises more than 30 provider-merger retrospectives, with contributors from within and without BE. Those, in turn, inform and are informed by the larger body of research regarding health-care merger retrospectives. Fed. Trade Comm’n, Merger Retrospectives Bibliography, https://www.ftc.gov/policy/studies/merger-retrospective-program/bibliography (last visited May 10, 2024).
[40] Joseph Farrell, Paul Pautler, & Michael Vita, Economics at the FTC: Retrospective Merger Analysis with a Focus on Hospitals, 35 Rev. Indus. Org. 369 (2009).
[41] See, Overview of the Merger Retrospective Program in the Bureau of Economics, Fed. Trade Comm’n (last visited Apr. 12, 2023), https://www.ftc.gov/policy/studies/merger-retrospective-program/overview; see also, Simons, supra note 35; Khan & Kanter, supra note 34.
[42] Salinger, supra note 35, at note 10.
[43] Ashenfelter et al., supra note 37, at 6-7.
[44] See, e.g., Romano & Balan, supra note 39 (regarding impact on clinical quality).
[45] See, e.g., Hass-Wilson & Garmon, supra note 39.
[46] Koch & Ulrick, supra note 32.
[47] See, e.g., Thomas G. Koch, Brett W. Wendling, & Nathan E. Wilson, The Effects of Physician and Hospital Integration on Medicare Beneficiaries’ Health Outcomes, 103 Rev. Econ. & Stats. 725 (2021) (initially published as BE Working Paper).
[48] See, e.g., Dennis W. Carlton, Why We Need to Measure the Effect of Merger Policy and How to Do It, 5 Comp. Pol’y Int. 77 (2009); Ashenfelter et al., supra note 37; Farrell, Pautler, & Vita, supra note 40.
[49] Matthew Panhans, Ted Rosenbaum, & Nathan E. Wilson, Prices for Medical Services Vary Within Hospitals, But Vary More Across Them, 78 Med. Care Res. Rev. 157 (2021, initially published as BE Working Paper); Koch, Wendling, & Wilson, Medicare Beneficiaries’ Health Outcomes, supra note 47 (initially published as BE Working Paper); Asako S. Moriya, William B. Vogt, & Martin Gaynor, Hospital Prices and Market Structure in the Hospital and Insurance Industry, 5 Health Econ, Pol’y & Law 1 (2010) (Martin Gaynor is a former director of the FTC’s Bureau of Economics presently serving as a special advisor to the assistant U.S. attorney general for antitrust); Martin Gaynor & William B. Vogt, Competition Among Hospitals, 34 RAND J. Econ. 764 (2003); Maximillian J. Pany, Michael E. Chernew, & Leemore S. Dafny, Regulating Hospital Prices Based on Market Concentration Is Likely to Leave High-Price Hospitals Unaffected, 40 Health Aff. 1386 (September 2021) (Dafny was deputy director for health care antitrust in the FTC’s Bureau of Economics from 2012-13); Leemore S. Dafny, Hospital Industry Consolidation—Still More to Come?, 370 New Eng. J. Med. 198 (2014); Devesh Raval et al., Using Disaster Induced Closures to Evaluate Discrete Choice Models of Hospital Demand, 53 RAND J. Econ. 561 (2022) (initially published as BE Working Paper); Nathan E. Wilson, Market Structure as a Determinant of Patient Care Quality, 2 Amer. J. Health Econ. 241 (2016) (studying hemodialysis care) (initially published as BE Working Paper).
[50] See, e.g., Devesh Raval, Ted Rosenbaum, & Nathan E. Wilson, Using Disaster-Induced Closures to Evaluate Discrete Choice Models of Hospital Demand, 53 RAND J. Econ. 561 (2022). Event studies are, of course, also observational studies, even if they—and merger retrospectives—may be considered in some regards “quasi-experimental.”
[51] David J. Balan & Keith Brand, Simulating Hospital Merger Simulations, 71 J. Indus. Econ. 47 (2023) (initially published as BE Working Paper); see also Leemore Dafny, Katherine Ho, & Robin Lee, The Price Effects of Cross-Market Mergers: Theory and Evidence from the Hospital Industry, 50 RAND J. Econ. 286 (2019) (theoretical analysis with empirical extension).
[52] See, e.g., Carlson et al., supra note 32 (citing Cory Capps, David Dranove, & Mark Satterthwaite, Competition and Market Power in Option Demand Markets, 34 RAND J. Econ. 737 (2003); Robert Town & Gregory Vistnes, Hospital Competition in HMO Networks, 20 J. Health Econ. 753 (2001)).
[53] Koch, Wendling, & Wilson, Quantity and Spending, supra note 32; Koch, Wendling, & Wilson, Health Outcomes, supra note 47.
[54] Dafny, Ho, & Lee, supra note 51; see also, Keith Brand & Ted Rosenbaum, A Review of the Economic Literature on Cross-Market Healthcare Mergers, 82 Antitrust L.J. 533 (2019).
[55] Keith Brand, Martin Gaynor, Patrick McAlvanah, David Schmidt, & Elizabeth Scheirov, Economics at the FTC: Office Supply Retailers Redux, Healthcare Quality Efficiencies Analysis, and Litigation of an Alleged Get-Rich-Quick Scheme, 45 Rev. Indus. Org. 325 (2014); Julie A. Carlson, Leemore S. Dafny, Beth A. Freeborn, Pauline M. Ippolito, & Brett W. Wendling, Economics at the FTC: Physician Acquisitions, Standard Essential Patents, and Accuracy of Credit Reporting, 43 Rev. Indus. Org. 303 (2013); Joseph Farrell, David J. Balan, Keith Brand, & Brett W. Wendling, Economics at the FTC: Hospital Mergers, Authorized Generic Drugs, and Consumer Credit Markets, 39 Rev. Indus. Org. 271 (2011). Cf. Martin Gaynor, Kate Ho, & Robert J. Town, The Industrial Organization of Health-Care Markets, 53 J. Econ. Lit. 235 (2015); Brand & Rosenbaum, supra note 54 (review of cross-market health-care mergers literature).
[56] See Carlson et al., supra note 32.
[57] RFI at 4.
[58] See, e.g., FTC Staff Comment to the Food and Drug Administration in Docket No. FDA-2021-N-0555 Concerning Over-the-Counter Hearing Aids, Fed. Trade Comm’n (Jan. 28, 2022), available at https://www.ftc.gov/system/files/documents/advocacy_documents/ftc-staff-comment-federal-drug-administration-docket-no-fda-2021-n-0555-concerning-over-counter/v220000staffcommentotchearingaids2.pdf (noting the likely procompetitive effect of rule).
[59] 16 C.F.R. § 315.
[60] 15 U.S.C. 7601-7610.
[61] 21 C.F.R. § 800.30.
[62] Pub. L. 115-52, 131 Stat. 1005, Aug. 18, 2017.
[63] See, e.g., Thomas W. Merrill, Antitrust Rulemaking: the FTC’s Delegation Deficit, 75 Admin Law Rev. 277 (2023) (“the FTC has no legal authority to engage in legislative rulemaking on competition matters.” Id. at 278); see also, Thomas W. Merrill et al., Agency Rules with the Force of Law: The Original Convention, 116 Harv. L. Rev. 467 (2002).
[64] Broadcast Music, Inc. v. Columbia Broad. Sys., Inc., 441 U.S. 1, 19-20 (1979) (citations omitted).
[65] Sneha Kannan, Joseph Dov Bruch, & Zirui Song, Changes in Hospital Adverse Events and Patient Outcomes Associated with Private Equity Acquisition, 330 JAMA 2365 (2023).
[66] As discussed below, other studies suggest mixed results. See, e.g., infra. note 118, and accompanying text.
[67] Regarding competition advocacy generally, see, e.g., James C. Cooper, Paul A. Pautler, & Todd J. Zywicki, Theory and Practice of Competition Advocacy at the FTC, 72 Antitrust L.J. 1091 (2005); Maureen K. Ohlhausen, Identifying, Challenging, and Assigning Political Responsibility for State Regulation Restricting Competition, 2 Comp. Pol’y Int. 151 (2006); Daniel J. Gilman, Advocacy, in SAGE Encyclopedia of Political Behavior 8 (Fathali M. Moghaddam ed., 2017). Links to numerous studies, reports, and advocacy documents by the FTC and its staff are at https://www.ftc.gov/advice-guidance/competition-guidance/industry-guidance/competition-health-care-marketplace. We note that FTC and DOJ jointly issued many such documents. See, e.g., Joint Statement of the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice Regarding Certificate-of-Need (CON) Laws and Alaska Senate Bill 62, Which Would Repeal Alaska’s CON Program (Apr. 12, 2017), available at https://www.ftc.gov/system/files/documents/advocacy_documents/joint-statement-federal-trade-commission-antitrust-division-us-department-justice-regarding/v170006_ftc-doj_comment_on_alaska_senate_bill_re_state_con_law.pdf.
[68] RFI at 5.
[69] RFI at 6.
[70] Steven C. Salop & David T. Scheffman, Cost-Raising Strategies, 36 J. Indus. Econ. 19 (1985).
[71] Janusz A. Ordover, Garth Saloner, & Steven C. Salop, Equilibrium Vertical Foreclosure, 80 Am. Econ. Rev. 127 (1990).
[72] Malcolm B. Coate & Andrew N. Kleit, Exclusion, Collusion, and Confusion: The Limits of Raising Rivals’ Costs (FTC Bureau of Economics, Working Paper No. 179, 1990).
[73] Id. at 3.
[74] James C. Cooper et al., Vertical Antitrust Policy as a Problem of Inference, 23 Int’l. J. Indus. Org. 639, 643 (2005).
[75] David Reiffen & Michael Vita, Comment: Is There New Thinking on Vertical Mergers? 63 Antitrust L. J. 917 (1995); see also, e.g., Daniel O’Brien, The Antitrust Treatment of Vertical Restraint: Beyond the Possibility Theorems, in THE PROS AND CONS OF VERTICAL RESTRAINTS 22, 36 (Konkurrensverket ed., 2008); Michael A. Salinger, Vertical Mergers and Market Foreclosure, 103 Q. J. Econ. 345 (1988).
[76] Henry Ogden Armour & David Teece, Vertical Integration and Technological Innovation, 62 Rev. Econ. & Stat. 470 (1980).
[77] Dennis W. Carlton, Transaction Costs and Competition Policy, 73 Int’l J. Indus. Org. 1 (2020).
[78] Francine Lafontaine & Margaret Slade, Vertical Integration and Firm Boundaries: The Evidence, 45 J. Econ. Lit. 629, 677 (2007).
[79] Id.
[80] Id.
[81] Id.
[82] Cooper et al., supra note 74, at 639.
[83] John M. Yun, Vertical Mergers and Integration in Digital Markets, in THE GAI REPORT ON THE DIGITAL ECONOMY (Joshua D. Wright & Douglas H. Ginsburg eds., 2020) at 245.
[84] Francine Lafontaine, Vertical Mergers (Presentation Slides), in FTC, Competition and Consumer Protection in the 21st Century; FTC Hearing #5: Vertical Merger Analysis and the Role of the Consumer Welfare Standard in U.S. Antitrust Law, Presentation Slides 93 (Nov. 1, 2018), available at https://www.ftc.gov/system/files/documents/public_events/1415284/ftc_hearings_5_georgetown_slides.pdf. See also Francine Lafontaine & Margaret E. Slade, Presumptions in Vertical Mergers: The Role of Evidence, 59 Rev. Indus. Org. 255 (2021).
[85] See Koch, Wendling, & Wilson, Outcomes, supra note 47 (discussing research challenges and mixed results in the literature).
[86] Koch, Wendling, & Wilson, Quantity and Cost of Care, supra note 32
[87] Id. at 20.
[88] Id. at 20.
[89] Koch, Wendling, & Wilson, Outcomes, supra note 47.
[90] Conglomerate Effects of Mergers – Note by the United States 2, OECD (Jun. 10, 2020), available at https://www.ftc.gov/system/files/attachments/us-submissions-oecd-2010-present-other-international-competition-fora/oecd-conglomerate_mergers_us_submission.pdf (“Conglomerate Effects”).
[91] Id. at 2-3.
[92] Research and Development in the Pharmaceutical Industry, Cong. Budget Off. (April 2021), https://www.cbo.gov/publication/57126.
[93] Josh Feng et al., Mergers that Matter: The Impact of M&A Activity in Prescription Drug Markets 6 (SSRN Working Paper, Jul. 25, 2023), https://ssrn.com/abstract=4523015.
[94] Id. at 5-6.
[95] Leemore Dafny, Katherine Ho, & Robin Lee, The Price Effects of Cross-Market Mergers: Theory and Evidence from the Hospital Industry, 50 RAND J. Econ. 286 (2019) (finding price effects for mergers across geographic markets, but within state boundaries); see also Keith Brand & Ted Rosenbaum, A Review of the Economic Literature on Cross-Market Healthcare Mergers, 82 Antitrust L.J. 533 (2019) (reviewing several studies and noting observed competitive effects and issues for further study).
[96] See, e.g., Brand & Rosenbaum, supra note 95 (regarding possible application to hospital-merger cases, among others, as well as issues for further research).
[97] We note that, e.g., in January 2021, the FTC issued orders under its FTC Act Section 6(b) authority to six health-insurance companies to furnish information in order to facilitate the agency’s study of the effects of physician group and health-care-facility consolidation from 2015 through 2020. Press Release, FTC to Study the Impact of Physician Group and Healthcare Facility Mergers, Fed. Trade Comm’n (Jan.14, 2021), https://www.ftc.gov/news-events/news/press-releases/2021/01/ftc-study-impact-physician-group-healthcare-facility-mergers. While the information collected under such orders is limited partly by restrictions imposed under the Paperwork Reduction Act, and not merely available data and methodological concerns, it may nonetheless help advance understanding of provider consolidation.
[98] Kannan et al., supra note 65.
[99] RFI at 1 (the second sentence of the summary).
[100] See generally, e.g., FTC v. Phoebe Putney Health Sys., Inc., 568 U.S. 216 (2013). In its unanimous decision, the Court noted that the 11th U.S. Circuit Court of Appeals had, as an initial matter, “‘agreed with the [FTC] that, on the facts alleged, the joint operation of Memorial and Palmyra would substantially lessen competition or tend to create, if not create, a monopoly’” 568 U.S. at 222-3 (quoting FTC v. Phoebe Putney Health Sys., Inc., 663 F.3d 1369, 1375 (2011). The Court’s holding in Phoebe Putney upheld the FTC’s jurisdiction over the hospital merger, notwithstanding the grant of certain powers to hospital authorities by the State of Georgia. 568 U.S. at 224. For a discussion of various FTC research, advocacy, and enforcement activities in health care, including scrutiny of provider mergers, see, e.g., Maureen K. Ohlhausen, The First Wealth is Health: Protecting Competition in Healthcare Markets, Remarks at the 2017 ABA Fall Forum (Nov. 16, 2017), available at https://www.ftc.gov/system/files/documents/public_statements/1275573/mko_fall_forum_2017.pdf. While the FTC and the DOJ have concurrent jurisdiction over mergers under Section 7 of the Clayton Act, health-care-provider mergers are typically assigned to the FTC under the FTC/DOJ clearance process. For a list of health-care-enforcement matters, see FTC, The FTC’s Health Care Work: Cases, https://www.ftc.gov/news-events/topics/competition-enforcement/health-care-competition (last visited May 1, 2024).
[101] See, e.g., David J. Balan & Patrick S. Romano, A Retrospective Analysis of the Clinical Quality Effects of the Acquisition of Highland Park Hospital by Evanston Northwestern Healthcare, 18 Int. J. Econ. Bus. 45 (2011) (initially published as a BE Working Paper, available at https://www.ftc.gov/sites/default/files/documents/reports/retrospective-analysis-clinical-quality-effects-acquisition-highland-park-hospital-evanston/wp307.pdf).
[102] Gaynor testimony, supra note 3.
[103] Ashenfelter et al., supra note 37, at 12.
[104] Id.
[105] See, e.g., Wilson, supra note 49 (studying hemodialysis care and finding no statistically significant indication that for-profit status is associated with a different quality of care; and comparing, e.g., Paul Grieco, & Ryan C. McDevitt, Productivity and Quality in Health Care: Evidence from the Dialysis Industry, 84 Rev. Econ. Studs. 1071 (2006) with John M. Brooks et al., Effect of Dialysis Center Profit-Status on Patient Survival: A Comparison of Risk-Adjustment and Instrumental Variable Approaches, 41 Health Servs. Res. (2006)). As we note below, it may be difficult to generalize observations from the U.S. dialysis industry because of both variation in the quality of care and the degree to which two firms account for for-profit acquisitions of independent facilities.
[106] See Wilson, supra note 49.
[107] For example, in a 2020 paper, Eliason et al. observed that only 21% of dialysis facilities were independently owned, and that two large, publicly traded companies owned 60% of the facilities and 90% of the revenue in the space. Paul J. Eliason et al., How Acquisitions Affect Firm Behavior and Performance: Evidence from the Dialysis Industry, 135 Q. J. Econ. 221, 222 (220). We note, too, that the FTC already has consent orders in place with both of those firms. Under one such order, DaVita, Inc. was required to divest certain facilities and limit its use of noncompete agreements; it must also get prior approval for future acquisitions from the FTC. See, In the Matter of DaVita, Inc., and Total Renal Care, FTC File No. 211-0013 (Oct. 25, 2021), (agreement containing consent orders).
[108] RFI at 3.
[109] RFI at 5.
[110] RFI at 4-5.
[111] Elena Praeger & Matt Schmitt, Employer Consolidation and Wages: Evidence from Hospitals, 111 Am. Econ. Rev. 397–427 (2021). Praeger & Schmitt examine whether hospital employees’ wage growth slows following consolidation. While they observe some slowing wage growth under limited conditions (large increases in concentration, plus industry-specific skills), they fail to reject zero wage effects in most cases.
[112] See supra note 10.
[113] FTC v. Phoebe Putney Health Sys., Inc., 568 U.S. 216 (2013).
[114] See, e.g., FTC Staff Comment Before the Georgia Department of Community Health Regarding the Certificate of Need Application Filed by Lee County Medical Center, Fed. Trade Comm’n (2017), available at https://www.ftc.gov/system/files/documents/advocacy_documents/ftc-staff-comment-georgia-department-community-health-regarding-certificate-need-application-filed/v180001gaconleecounty_and_attachments.pdf (discussing ongoing dearth of competition for hospital services in surrounding five-county area).
[115] For example, in a 2019 letter to the Texas Medical Board, FTC staff noted that most of the critical-access hospitals in Texas were located in counties where there were no practicing anesthesiologists, with 37 of those hospitals located in counties where certified-registered-nurse anesthetists were the only licensed, specialized providers of anesthesia and anesthesia-related services. FTC Comment to Texas Medical Board on Its Proposed Rule 193.13 to Add Supervision Requirements for Texas-Certified Nurse Anesthetists, 2, Fed. Trade Comm’n (2019), available at https://www.ftc.gov/system/files/documents/advocacy_documents/ftc-comment-texas-medical-board-its-proposed-rule-19313-add-supervision-requirements-texas-certified/v200004_texas_nurse_anesthetists_advocacy_letter.pdf.
[116] See supra text accompanying notes 105-107.
[117] Id. (citing Wilson, supra note 49).
[118] Kannan et al., supra note 65.
[119] Joseph D. Bruch, Suhas Gondi, & Zirui Song, Changes in Hospital Income, Use, and Quality Associated with Private Equity Acquisition, 180 JAMA Intern. Med. 1 (2020).
[120] Agency staff have no doubt also noticed that the studies regard limited numbers of private-equity acquirers. For example, the Bruch, Gondi, & Song study, id., incorporates numerous acquisitions by the Hospital Corporation of America (HCA), which may provide a sharper picture of HCA acquisitions, but may or may not generalize across the industry.
[121] American Medical Assn. v. FTC, 638 F.2d 443 (2d Cir. 1980) (aff’d per curiam American Medical Assn. v. FTC, 455 U.S. 676 (1982)); cf., e.g., Matthew Mandelberg et al., Reconsidering the Ban on Physician-Owned Hospitals to Combat Consolidation, and Matthew Mandelberg, Michael Smith, Jesse Ehrenfeld, & Brian Miller, Reconsidering the Ban on Physician-Owned Hospitals to Combat Consolidation (Feb. 5, 2023). Forthcoming in N.Y.U. J. Leg. & Pub. Pol’y, available at SSRN: https://ssrn.com/abstract=4350105.
[122] Statement on L.D. 1866 to the Committee on Bus. Leg., Maine House of Representatives (Jan. 8, 1992), available at https://www.ftc.gov/sites/default/files/documents/advocacy_documents/ftc-staff-comment-maine-house-representatives-committee-business-legislation-concerning-l.d.1866-repeal-prohibitions-against-optometry-practice-retail-settings-and-corporate-affiliations/af-21.pdf; see also, FTC Staff Comment Before the North Carolina State Board of Opticians Concerning Proposed Regulations for Optical Goods and Optical Goods Businesses, Fed. Trade Comm’n (2011), https://www.ftc.gov/legal-library/browse/advocacy-filings/ftc-staff-comment-north-carolina-state-board-opticians-concerning-proposed-regulations-optical-goods. Cf. FTC Staff Comment to the Food & Drug Admin. in Docket No. FDA-2021-N-055 Concerning Over-the-Counter Hearing Aids, Fed. Trade Comm’n (Jan. 8, 2022), available at https://www.ftc.gov/system/files/documents/advocacy_documents/ftc-staff-comment-federal-drug-administration-docket-no-fda-2021-n-0555-concerning-over-counter/v220000staffcommentotchearingaids2.pdf.
[123] A 2009 report by then-FTC Chair William Kovacic defines “policy R&D” broadly in a way that comprises, but is not limited to, original, author-initiated academic research by BE staff. It also includes various review, issue-spotting, and synthetic endeavors, such as policy workshops and, indeed, requests for public information. William E. Kovacic, The Federal Trade Commission at 100: Into Our Second Century, 91-92 (Jan. 2009), available at https://www.ftc.gov/sites/default/files/documents/public_statements/federal-trade-commission-100-our-second-century/ftc100rpt.pdf.
[124] RFI at 3.
[125] Id. at 3-4.
[126] For a review of diverse endeavors, see, e.g., Ohlhausen, supra note 3.
[127] Press Release, Federal Trade Commission, Department of Justice, and Department of Health and Human Services Launch Cross-Government Inquiry on Impact of Corporate Greed in Health Care, Fed. Trade Comm’n (Mar. 5, 2024), https://www.ftc.gov/news-events/news/press-releases/2024/03/federal-trade-commission-department-justice-department-health-human-services-launch-cross-government.
[128] Press Release, FTC, DOJ, and HHS Extend Comment Period on Cross-Government Inquiry on Impact of Corporate Greed in Health Care, Fed. Trade Comm’n (May 1, 2024), https://www.ftc.gov/news-events/news/press-releases/2024/05/ftc-doj-hhs-extend-comment-period-cross-government-inquiry-impact-corporate-greed-health-care?utm_source=govdelivery.
[129] Press Release, Fact Sheet: Biden-Harris Administration Announces New Actions to Lower Health Care and Prescription Drug Costs by Promoting Competition, The White House (Dec. 7, 2023), https://www.whitehouse.gov/briefing-room/statements-releases/2023/12/07/fact-sheet-biden-harris-administration-announces-new-actions-to-lower-health-care-and-prescription-drug-costs-by-promoting-competition.
[130] See, e.g., Press Release, Justice Department, Federal Trade Commission and Department of Health and Human Services Issue Request for Public Input as Part of Inquiry into Impacts of Corporate Ownership Trend in Health Care, Dep’t Justice, (Mar. 5, 2024), https://www.justice.gov/opa/pr/justice-department-federal-trade-commission-and-department-health-and-human-services-issue.
[131] RFI at 3.
[132] See supra Section II.D.
[133] Gaynor statement, supra note 3.
[134] Private Capital, Public Impact: An FTC Workshop on Private Equity in Health Care, Fed. Trade Comm’n (May 5, 2024), https://www.ftc.gov/news-events/events/2024/03/private-capital-public-impact-ftc-workshop-private-equity-health-care. The workshop webpage includes a description, along with links to the agenda, participant biographies, and a transcript of the proceedings.
[135] Id.; Press Release, Justice Department, Federal Trade Commission and Department of Health and Human Services Issue Request for Public Input as Part of Inquiry into Impacts of Corporate Ownership Trend in Health Care, Dep’t Justice (Mar. 5, 2024), https://www.justice.gov/opa/pr/justice-department-federal-trade-commission-and-department-health-and-human-services-issue; Press Release, HHS, DOJ, and FTC Issue Request for Public Input as Part of Inquiry into Impacts of Corporate Ownership Trend in Health Care, Dep’t Health & Human Servs. (Mar. 5, 2024), https://www.hhs.gov/about/news/2024/03/05/issue-request-for-public-input-as-part-of-inquiry-into-impacts-of-corporate-ownership-trend-in-health-care.html.
[136] Their testimony is confined to their own perceptions of, as the agencies themselves put it in the RFI, “how their experiences . . . changed after a facility or other provider where they work or receive treatment or services was acquired or underwent a merger.” Such perceptions may help make certain policy concerns vivid or accessible, but there is no credible argument that they were either randomly selected or representative of practitioner experience, much less that they represent legal or economic analyses of the acquisitions under discussion. That they may be considered as part of a larger policy inquiry is uncontroversial. That three such participants were selected for such a brief workshop—absent industry participants, and given the dearth of economic evidence and legal perspectives beyond those of enforcers—strains credulity.
[137] See supra note 135.
Popular Media California does not have a reputation for business-friendly legislation. This makes it all the more surprising that a California legislative report rejected a New York . . .
California does not have a reputation for business-friendly legislation. This makes it all the more surprising that a California legislative report rejected a New York bill as too anti-business for the Golden State. That bill, the 21st Century Antitrust Act, championed by New York State Senate Deputy Majority Leader Michael Gianaris (D-Queens), would import European competition-policy principles and expand on them, ultimately making New York an outlier in U.S. antitrust enforcement.
In its current form, Gianaris’ bill would lead enforcers to punish the mere possession of monopoly power, rather than anti-competitive behavior that harms consumers. This marks a firm rejection of longstanding U.S. antitrust principles. Indeed, not punishing monopolization has been a longstanding concern of U.S. antitrust law. As Albany native and Second Circuit Court of Appeals Judge Learned Hand wrote in 1945: “The successful competitor, having been urged to compete, must not be turned upon when he wins.”
ICLE White Paper I. Introduction In mid-2021, the International Center for Law & Economics (ICLE) published a white paper on the state of broadband competition in the United . . .
In mid-2021, the International Center for Law & Economics (ICLE) published a white paper on the state of broadband competition in the United States,[1] which concluded that:
Rather than repeat the analysis conducted in the 2021 report, in this report, we investigate the extent to which broadband competition has evolved over the past three years. We find that it has been a rapid evolution:
When the 2021 ICLE white paper was published, the worst of the COVID-19 pandemic appeared to be over, but the virus’ Delta variant was surging.[3] With pandemic precautions keeping people at home to work, go to school, visit health-care providers, or be entertained, broadband access and use was seen by many as a necessity, rather than a luxury. At the time, Congress considered whether to devote significant federal resources toward promoting broadband access in underserved communities. Toward this end, in November 2021, Congress passed the Infrastructure Investment and Jobs Act (IIJA), which includes three key provisions to foster greater broadband access:[4]
These three policies were intended to intertwine in order to foster greater broadband competition. ACP subsidies are intended to boost consumer demand for broadband and generate revenue to support providers’ profitable deployment of broadband investments.[5] BEAD investments are intended to reduce the costs of broadband deployment.[6] The law’s digital-discrimination provisions were intended to prevent discrimination by broadband providers that serves to deny or limit consumers’ access to broadband internet.[7]
Alas, today, we find that each of these provisions faces headwinds. With Congress failing to extend appropriations beyond a May 31 deadline, the ACP has run out of funding.[8] States attempting to implement the BEAD program have complained of tight timelines, restrictive rules, limited coordination, and administrative burdens that may undermine effectiveness.[9] Providers and local jurisdictions report that BEAD’s Buy America rules are particularly onerous.[10] Smaller internet service providers say BEAD’s financial requirements exclude them from projects they would otherwise be able to complete successfully.[11] Complying with Buy America rules regarding attaching equipment to utility poles and railroad crossings also threatens deployment timelines.[12] And, in November 2023, the FCC approved rules to apply a disparate-impact approach toward the IIJA’s digital-discrimination mandate, which could raise constitutional issues over the major questions doctrine.[13]
In addition to these programs, the FCC appears dead set to regulate more stringently much of the broadband-internet industry. First, the agency’s sweeping digital-discrimination rules cover nearly every aspect of the deployment and delivery of internet services and nearly every entity associated—even tangentially—with deployment and delivery.[14] Next, the agency approved Title II common-carrier regulation with its recently adopted Safeguarding and Securing the Open Internet Order.[15],[16]
The current state of broadband competition policy appears to be one of confusion. Some policies foster competition, while others hinder it. Programs such as the ACP and BEAD could do much to encourage competition by simultaneously generating demand for broadband and helping to build out supply. At the same time, these programs—especially BEAD—attempt to micromanage competition with stifling conditions and de facto rate regulation. Similarly, the FCC’s digital-discrimination rules explicitly subject broadband pricing to ex post scrutiny and enforcement. The FCC’s reclassification of broadband internet-access services under Title II of the Communications Act raises the specter of common-carrier rate regulation that will hang over the industry unless either vacated by the courts, or a future administration once again reverses course.
Put simply, broadband competition in the United States is currently robust, innovative, and successful. But this state of vibrant competition is at risk from recent and forthcoming regulations. Without a course correction, we are likely to see slowing or shrinking broadband investment, reduced innovation, and the exit of small and rural providers.
By all relevant measures, U.S. broadband competition is vibrant and has increased dramatically since the COVID-19 pandemic. Since 2021, more households are connected to the internet, broadband speeds have increased, prices have fallen, more households are served by more than a single provider, and new technologies like satellite and 5G have expanded internet access and intermodal competition among providers.
By any reasonable measure today’s U.S. broadband market is an incredible success. Nearly the entire country has access to at-home internet, a vast majority has access to high-speed internet, and much of the country has access to these speeds from three or more providers. Nevertheless, criticisms of the current state of broadband deployment claim that too few Americans have affordable access to adequate broadband speed and capacity and that this, in turn, is the result of insufficient competition among broadband providers.[17] For example, in her speech announcing the FCC’s most recent process to regulate internet services under Title II, Chair Rosenworcel claimed that 80% of the country faces a monopoly or duopoly for download speeds of 100 Mbps or greater.[18] These claims are belied by widespread broadband adoption and competitive markets.
SOURCE: U.S. Census Bureau, American Community Survey
The U.S. Census Bureau’s American Community Survey reports that 97.6% of households have access to at-home internet and 92.6% use the internet at home (Figure 1).[19] While a large majority with at-home internet get it through a broadband subscription, a substantial minority access the internet from their mobile wireless providers. A small number (2.3%) claim they can access the internet at home without paying for a subscription. This likely includes multi-family units, as well as student and senior housing in which broadband access is included in the rent. Among the 7.4% who do not use an at-home internet connection, two-thirds indicate that internet access is available, but they have chosen not to adopt it.[20]
In 2021, approximately 97 percent of 3- to 18-year-olds had home internet access, according to the National Center for Education Statistics. This represents a five-percentage-point increase since 2016.[21]
Until March 2024, the FCC defined high-speed broadband as internet service that offered speeds of at least 25/3 Mbps.[22] The IIJA defines a location as “unserved” if it has no internet connection available or only has a connection offering speeds of less than 25/3 Mbps.[23] A location is considered “underserved” if the only options available offer speeds of less than 100/20 Mbps.[24]
As shown in Figure 2, smaller households with relatively simple needs can generally access the internet productively with download speeds of less than 100 Mbps, or even 25 Mbps. The third iteration of the National Broadband Map, released in November 2023, indicated:[25]
SOURCE: Allconnect, ‘Everything You Need to Know;’ FCC, ‘Fixed Broadband Deployment’
SOURCE: HighSpeedInternet.com, ‘What Type of Internet Do You Have?’
The FCC reports that more than 90% of U.S. households have access to speeds of 100 Mbps or greater, and nearly 90% have access to 1 Gbps or greater (Table 1).[26] Fewer than 4% of U.S. households lack access to at least 30 Mbps download speeds via fixed broadband.
SOURCE: FCC, ‘International Broadband Data Report’[27]
Some note that, while high-speed connections are available across nearly the entire country, in many cases, only a single provider offers such speeds. This, such critics assert, suggests insufficient competition among providers of high-speed internet. For example, regarding 100 Mbps service, FCC Chair Rosenworcel claimed that “only half of us can get it from more than a single provider. Only one-fifth of the country has more than two choices at this speed.”[28]
This provides a misleading sense of the rate of high-speed broadband deployment and the scope of availability. The most recent information from the FCC on broadband deployment across the United States suggests that 90% of the population in 2021 was served by one or more providers offering 250/25 Mbps or higher speeds (Table 2).[29] That is more than double the population share five years earlier, when only 44% of the population had access to such speeds.[30] In 2019, the FCC did not report the share of population with access to 1,000/100 Mbps speeds or greater. By 2021, 28% of the population had access to gigabit download speeds.[31]
Moreover, Table 2 shows that, in 2021, more than 85% of the population was covered by two or more fixed-broadband providers offering 25/3 Mbps or greater speeds, and more than 60% of the country was covered by three or more providers providing such speeds. Moreover, if satellite and 5G providers are included, close to 100% of the country is served by two or more high-speed providers.
SOURCE: FCC, ‘Fixed Broadband Deployment’
At the same time, the evidence indicates that broadband competition has increased over time, as measured by the number of competing high-speed providers (Figure 4).[32]
SOURCE: FCC, ‘2022 Communications Marketplace Report’
Additionally, intermodal competition among providers is only improving. Starlink satellite service has been made available to all locations in the United States.[33] Starlink’s reported speeds are between 25/5 Mbps and 220/25 Mbps.[34] And Project Kuiper has successfully launched its first test satellites,[35] with commercial service expected to begin in the second half of 2024.[36]
After accounting for speed and data usage, the United States has some of the lowest broadband prices in the world. Even so, critics of the current state of U.S. broadband competition claim that U.S. prices are among the highest in the developed world because, they claim, the U.S. market is not as competitive as other jurisdictions. For example, the Community Tech Network asks rhetorically, “[s]o why does the internet cost so much more in the U.S. than in other countries? One possible answer is the lack of competition.”[37] Their article included a graphic in which U.S. internet service is described as “expensive and slow” while Australia is categorized as “fast and cheap.” Yet none of these claims hold up under scrutiny, such as adjusting for consumption and download speeds.
It’s true the United States has the third-highest average monthly broadband costs among OECD countries, according to Cable.co.uk (Figure 5). Australia, however, has the seventh-highest.[38] On a cost-per-megabit basis, Australia has the second-highest costs in the OECD, while the United States is in the bottom third of the distribution (Figure 6).[39] Speedtest’s Global Index of median speeds reports that the United States has the second-fastest median speed, and Australia the third-slowest median speed, among OECD countries (Figure 7).[40]
SOURCE: Cable.co.uk, ‘Global Broadband Pricing League Table 2023’
SOURCE: Speedtest, Global Index
Cross-country comparisons of broadband pricing are especially fraught, due to country-by-country variations in factors that drive the costs of delivering broadband and the prices paid by consumers.[41] Deployment costs are driven largely by population density and terrain, as well as each country’s unique regulatory and tax policies.[42] Consumer choices often drive the prices paid by subscribers. These include choices regarding the mix of fixed broadband and mobile, speed preferences, and data consumption.[43]
For example, Figure 8 demonstrates a clear relationship between the average monthly cost for broadband and the monthly cost per megabit; a higher monthly cost tends to be associated with a higher cost per megabit. But there are outliers. The United States is well below the trendline, but Canada is well above it. While the average monthly cost in the two countries is similar, the information provided by Cable.co.uk suggests that U.S. consumers use 9-10 times more megabits per month than Canadian consumers. In addition, as shown in Figure 7, the median U.S. download speed is about 35% faster than the median in Canada.
SOURCE: Cable.co.uk, ‘Global Broadband Pricing League Table 2023’; Speedtest, Global Index
A broadband-pricing index published annually by USTelecom reports that inflation-adjusted broadband prices for the most popular speed tiers fell by 54.7% from 2015 to 2023, or 5.6% annually.[44] Prices for the highest speed tiers fell by 55.8% over the same period. The Producer Price Index for residential internet-access services fell by 11.2% from 2015 through July 2023.[45] The median fixed-broadband connection in the United States delivers more than 207 Mbps download service, an 80% increase over pre-pandemic median speeds (Figure 10).[46]
SOURCE: Speedtest, Global Index (July of each year)
Evidence from large surveys suggests that price is not a dominant factor driving adoption for the currently unconnected. For example, among the 7% of households who do not use the internet at home, more than half of Current Population Survey respondents indicated that they “don’t need it or [are] not interested.”[47] About one-third of respondents indicated that price is a factor, with responses such as “can’t afford it” or “not worth the cost.”[48]
Of course, cost and interest are not mutually exclusive factors.[49] A common response to CPS surveys among those who do not subscribe to internet service is that it is “not worth the cost.” This is an unhelpful response to guide policymakers because it doesn’t answer whether the cost is “too high,” the value is “too low,” or a combination of both. Another common response is “not interested.” This, too, is unhelpful, as it does not identify the price at which a potential consumer might become interested, if such a price exists. For example, surveys suggest that some nonadopters may become interested in subscribing to internet services or find it worth the cost at a price of zero.
In addition, as shown in Figure 1, about a quarter of households without a broadband or smartphone subscription claim that they can access the internet at home without paying for a subscription.
Jamie Greig & Hannah Nelson note that low-income households are more likely to use smartphones than computers for internet access.[52] According to Pew Research, 19% of adults who do not have at-home broadband report that their smartphone does everything they need to do online.[53] Colin Rhinesmith et al. summarize the response of a Detroit focus group participant: “[I]f he had to choose between home access and mobile access, the latter is more desirable as it allows him to be reachable and flexible for job interviews and the like”[54]
When the FCC issued the Open Internet Order (OIO) in 2015 to reclassify broadband internet-access service under Title II, opponents claimed the policy would diminish broadband investment. Similarly, when the FCC repealed the reclassification in 2018, opponents claimed the repeal would diminish broadband investment. While U.S. broadband capital expenditures have been relatively stable for the past two decades, there was a noticeable drop in the wake of the 2015 OIO (Figure 11).[55]
SOURCE: USTelecom
Recent peer-reviewed econometric research from economist Wolfgang Briglauer and his coauthors—indicates that net-neutrality rules do, in fact, slow broadband investment, as measured by the number of fiber connections deployed.[56] The study analyzed 2000-2021 data across OECD countries. Thus, it includes both 2015’s imposition of Title II regulations in the United States and the 2017 repeal. It found that introducing net-neutrality rules was associated with a 22-25% decrease in fiber investments.
Briglauer’s study isolated the effects of net neutrality from other factors that might have affected investment, such as general economic conditions. It focused on new fiber connections as representing growth in network capacity, rather than short-term fluctuations in spending. Even controlling for other variables, net neutrality had an independent negative relationship with fiber deployments.
ICLE’s 2021 white paper argued that broadband markets are dynamic and characterized by ongoing innovation in technologies and business models. Investment and innovation do not solely come from new entrants, as incumbents often are important sources of innovation while they try to stay competitive and avoid disruption. In this way, providers compete through new product introductions and disruption, not just on price. Because of these dynamics, mergers and increased concentration can sometimes be associated with increased investment, in that they may allow firms to achieve greater economies of scale and scope.[57] In addition, firms make long-term investments to upgrade networks and deploy new technologies even amid just a few competitors.[58]
Since ICLE’s white paper, Kenneth Flamm & Pablo Varas published research examining the relationship between the change in a territory’s number of providers and changes in service-plan quality (e.g., upload and download speeds).[59] They examine Census blocks that were served by only two “legacy” broadband providers in 2014, which they define as cable and digital subscriber line (DSL) providers. Their study tracked entry and exit of providers in these blocks through 2018, and evaluated the change in maximum download speeds available in those blocks over time. They find that blocks with no entry or exit (what they call “unchanged duopoly”) experienced an increase of 750 Mbps in maximum download speeds (Figure 12). Blocks that transitioned from duopoly to monopoly experienced a relatively modest 430 Mbps increase, while blocks that transitioned from two to three providers experienced an 810 Mbps increase. Blocks that transitioned from three to four providers experienced an 854 Mbps increase.
They also noted that internet providers may be highly motivated to introduce new, higher-quality speed tiers as technology improves. These results comport with research summarized in the 2021 ICLE white paper, which found the most significant incremental benefits in broadband quality came from adding a second service provider (relative to monopoly), with some marginal benefit from adding a third provider, and a much smaller benefit from adding a fourth.
SOURCE: Flamm & Varas (2022)
Another recent study is Andrew Kearns’ analysis of the Seattle market.[60] In contrast to Flamm & Varas, Kearns concluded that competition among broadband providers might weaken the incentive to increase quality, which he measured as a provider upgrading a Census block to fiber. He argued that improvements in quality often require significant investment, and the returns on this investment may be uncertain in a competitive market. Thus, in a competitive market, providers may prioritize attracting customers with lower prices and a wider range of product options, rather than investing in improvements to the quality of their service. Even so, Kearns concluded that increased competition offers substantial benefits to consumers related to increased product choice and lower prices.
The latest published research supports ICLE’s earlier observation that whether adding or removing a competitor is associated with more or less investment depends greatly on various factors, including the market’s initial conditions.[61] Thus, a case can be made that competition (as judged by counting the number of competitors in a market) may be, in and of itself, of only lesser importance relative to other factors that guide investment decisions, such as population density, terrain, and demand, as well as the local regulatory and tax environment.[62]
Broadband internet has become a service that many Americans—and U.S. policymakers—consider essential. But new and forthcoming regulations imposed in an effort to promote equal access to broadband may actually risk dampening innovation and investment in this critical sector. In this section, we discuss the Affordable Connectivity Program and Broadband Equity, Access, and Deployment subsidy programs, which could foster broadband competition by stimulating both demand and supply. Even so, administration of both of these programs have erected significant hurdles that may damage their effectiveness if not remedied by Congress or the regulatory agencies.
We also discuss other programs that are likely to reduce broadband competition by diminishing the incentives to invest and innovate. Though motivated by a desire to prevent discriminatory access, rigid rules to correct “disparate impact” in broadband-deployment decisions fail to account for the dynamic efficiencies of differentiated service models calibrated to consumer demand. At the same time, attempts to impose common-carrier obligations on broadband providers ignore the truly competitive nature of modern broadband markets, which are thriving under light-touch regulation.
Going forward, policymakers should resist the temptation to micromanage a sector as dynamic as U.S. broadband internet. Instead, they should focus their attention on interventions to address genuinely unfair or anticompetitive conduct, while trusting that innovation and investment will be maximized when companies retain the flexibility to respond to consumer demand, while constrained by economic and technical realities.
The ACP is a federal subsidy program that provides eligible low-income households with monthly broadband-service discounts of up to $30, or up to $75 for households on tribal lands.[63] It also provides a one-time $100 discount for the purchase of a computer or tablet. ICLE has argued that well-designed subsidies targeted to underserved consumers can be an effective way to increase broadband deployment and adoption.[64] Subsidies help make providing service in high-cost, low-density areas more financially viable for providers. They also make broadband more affordable for lower-income consumers, stimulating demand.[65]
Proponents of the ACP identify two main goals for the program:
Through the ACP, the federal government absorbs part of the cost of providing broadband service to these households, making them more financially attractive customers for broadband providers. The program also creates an incentive for providers to expand their networks to reach eligible households, as they can now potentially recover more revenue from serving those users.[67] For example, if ACP subsidies stimulate consumer demand, providers may find it profitable to deploy broadband to areas that would not otherwise generate a sufficient return on investment to justify deployment. In some cases, a new provider might be able to offer services to a market currently served by a single incumbent firm.
To date, however, the ACP and its predecessors do not appear to have been as successful in increasing at-home internet adoption by unconnected households as was hoped when such programs were created. Due to what appears to be inelastic demand, ACP has faced difficulties in stimulating sufficient interest among the 5% of unconnected households who could access the internet, but fail to take up service.[68] These households may not be aware of the program or may lack digital literacy; may be able to access the internet without a subscription; or may have no interest in subscribing to an internet service at any price.
On the other hand, the ACP’s subsidies appear to have successfully enabled already-subscribed households to maintain at-home internet service through the COVID-19 pandemic, thereby proving effective in enabling economically vulnerable inframarginal consumers to remain connected. More than 23 million U.S. households (about 17%) were enrolled in the ACP before the program lapsed at the end of May 2024.[69] It is currently unknown how many of these households will unsubscribe now that ACP subsidies are unavailable. In turn, it’s also unknown how providers will respond should large number of households unsubscribe from their internet services.
In March 2024, the FCC announced that April 2024 would be the program’s last fully funded month, with partial subsidies through May 2024.[70] Without ACP subsidies, one expects some households will unsubscribe from internet service, and the decreased demand may even lead to consolidation in some markets through exits or mergers. Moreover, Congress’ failure to renew the ACP risks other long-term policy responses that could waste already-invested funds.
In the face of another economic downturn, the inframarginal households that unadopt internet service will likely spur future rounds of congressional appropriations to bring these households back online. This turmoil, meanwhile, stands to erode providers’ investment incentives, due to lack of demand. This threatens to create a vicious cycle that requires periodic reinvestment from Congress just to stand these programs back up. Over the long term, it would almost certainly be more efficient to extend and focus the ACP program to ensure that truly needy households receive the subsidy (including those that would otherwise unadopt), rather than construing the program as strictly focused on convincing the last 5% of households with inelastic demand to adopt.
In 2023, the NTIA awarded more than $42 billion in grants to state governments under the Broadband Equity, Access, and Deployment (BEAD) program,[71] whose primary purpose is to expand high-speed internet access in areas that currently lack it.[72] Congress focused the BEAD program on connecting “unserved” and “underserved” territories. The law requires that those areas lacking connections with speeds of at least 100/20 Mbps must be helped first before addressing other priorities, such as upgrades, adoption programs, and middle-mile infrastructure.[73] Funding is distributed directly to states, which are required to develop plans tailored to connect their unserved and underserved locations.[74]
But much of that congressional intent got muddled in the NTIA’s implementation of BEAD funding. The NTIA’s notice of funding opportunity (“NOFO”) introduced conflicting priorities beyond connecting the unserved. These additional priorities include “middle-class affordability” requirements, the provision of “low cost” plans, and a ban on data caps.[75] The NOFO also gave clear preference to fiber networks over wireless and satellite providers, and to governmental and municipal providers over private companies.[76]
The NTIA’s NOFO prompted each participating U.S. state or territory to include a “middle-class affordability plan to ensure that all consumers have access to affordable high-speed internet” (emphasis in original).[77] The notice provided several examples of how this could be achieved, including:
Despite the IIJA’s explicit prohibition of price regulation, the NTIA’s approval process appears to envision exactly this. The first example provided above is clear rate regulation. It specifies a price (“low-cost”); a quantity (“all middle-class households”); and imposes a quality mandate (“high-speed”). Toward these ends, the notice provides an example of a “low-cost” plan that would be acceptable to NTIA:
A policy bulletin published by the Phoenix Center for Advanced Legal & Economic Public Policy Studies notes that the NTIA did not conclude that broadband was unaffordable for middle-class households.[79] George Ford, the bulletin’s author, collected data on broadband adoption by income level. The data indicate that, in general, internet-adoption rates increase with higher income levels (Figure 12). Higher-income households have higher adoption rates (97.3%) than middle-income households (92.9%), which in turn have higher adoption rates than lower-income households (78.1%).
SOURCE: Adapted from Ford (2022), Table 2 and Figure 2.
For each of the 50 states and the District of Columbia, the Phoenix bulletin finds that middle-income internet-adoption rates are, to a statistically significant degree, higher than lower-income adoption. Thus, the Phoenix bulletin concludes that broadband currently is “affordable” to middle-class households and that “no direct intervention is required” to ensure affordability to the middle class.[80]
John Mayo, Greg Rosston, & Scott Wallsten point out that BEAD’s key purpose of providing high-speed internet access to locations that lack it (presumably because it’s too expensive to deploy to these areas without investment subsidies) conflicts with NTIA’s focus on affordability:
A substantial portion of the unserved and underserved areas of the country that are the likely targets of the BEAD program, however, are rural, low-population density areas where deployment costs will be high. These high deployment costs may seem to indicate that even “cost-based” rates—normally seen as an attractive competitive benchmark—may be high, violating the IIJA’s “affordability” standard.[81]
The only effective way to simultaneously reduce broadband prices, increase access, and improve quality is to increase supply. But the NTIA’s attempts at rate regulation work at cross-purposes with BEAD’s objective to increase supply. Therefore, attempts to use BEAD funding to impose price controls may act to reduce broadband competition, rather than preserve or increase it.
The potential harm to competition is worsened by NTIA’s preference for government or municipal providers over private providers, which we discuss in more detail in Section III.G. The NTIA’s funding notice required states to ensure the participation of “non-traditional broadband providers,” such as municipalities and cooperatives. Municipal broadband networks might make sense in some rare cases where private providers are unable to deploy, but such systems have generally mired taxpayers in expensive projects that failed to deliver on promises.
In addition to these challenges, BEAD applications must come with a letter of credit issued by a qualified bank for 25% of the grant amount.[82] This is a guarantee to the grant administrator (e.g., a state broadband office) that there is liquid cash in an account that it can claw back should the applicant not deliver on their grant requirements. To receive a letter of credit, applicants will be required by the issuing bank to provide collateral—which could be cash or cash equivalents equal to the full value of the letter of credit. The letter-of-credit requirement is separate and in addition to BEAD’s match requirement, which demands that applicants contribute a minimum 25% of the total build cost. The letter-of-credit and matching requirements may hinder competition by favoring large and well-capitalized providers over smaller internet-service providers (ISPs) that may be better positioned to serve rural areas.
In November 2023, NTIA released a waiver for the letter-of-credit requirement because of industry concerns about how the rule may prevent smaller ISPs from participating in the BEAD program.[83] The “programmatic waiver” describes several alternatives to the letter of credit. For example, subgrantees can obtain the letter of credit from a credit union instead of a bank. The expectation is that credit unions would offer lower interest rates for loans and lower fees. Alternatively, applicants can provide a performance bond “equal to 100% of the BEAD subaward amount.” In addition, the NTIA is allowing states and territories to reduce the percentage requirement of the performance bond or letter of credit over time, as service providers meet certain project milestones.
Congress set an ambitious goal with BEAD: To expand high-speed internet access in areas that currently lack it. The $42 billion appropriated for the program could have been used to deploy broadband to underserved areas and to foster broadband implementation. However, NTIA’s implementation of the program appears designed to dampen private investment and stifle competition among broadband, wireless, and satellite providers.
One of the most problematic new regulations to hit the broadband sector is the FCC’s digital-discrimination rules. While well-intentioned, these rules are virtually certain to curtail broadband investment and adoption. In late 2023, the FCC adopted final rules facilitating equal access to broadband internet under Section 60506 of the IIJA.[84] The statutory text directs the FCC to prevent discrimination in broadband access based on income level, race, ethnicity, color, religion, or national origin, while also directing the commission to consider issues of technical and economic feasibility.
The rules prohibit digital discrimination of access, which is defined as policies or practices that differentially affect or are intended to differentially affect consumers’ access to broadband internet-access service based on their income level, race, ethnicity, color, religion or national origin, unless justified by genuine issues of technical or economic feasibility.[85] The are two key provisions that will disrupt broadband competition, namely:
The rules apply to entities that provide, facilitate, and/or affect consumer access to broadband internet-access service. This includes typical broadband providers, as well as entities that “affect consumer access to broadband internet access service.”[86] Under this broad definition, local governments, nonprofits, and even apartment-building owners all may be subject to the FCC’s digital-discrimination rules.
The rules also revise the commission’s informal consumer-complaint process to accept complaints of digital discrimination of access, and to authorize the commission to initiate investigations and impose penalties and remedies for violations of the rules.[87]
The FCC also proposed additional rules that would require providers to submit annual reports on their major deployment, upgrade, and maintenance projects, and to establish and maintain internal compliance programs to assess whether their policies and practices advance or impede equal access to broadband internet-access service within their service areas.[88] In essence, these proposed rules would require providers to prepare their own disparate-impact analysis every year.
Because of the expansive definition of covered entities and services subject to the digital-discrimination rules, providers will face legal uncertainty and litigation risks.[89] The most obvious of these involve the likelihood of complaints or investigations based on allegations of disparate impact, which may be difficult to disprove. Comments to the FCC from the U.S. Chamber of Commerce highlight these concerns:[90]
These policies would render it impossible for businesses and the marketplace to make rational investment decisions. The scope of the services that the Draft covers is so broad that it does not provide meaningful guidance for how to comply. And because the Draft fails to grant sufficient guidance, it does not give fair notice of how to avoid liability. Consequently, investment in broadband innovation would disappear and consumers would have to pay higher costs for less efficient services.
The digital-discrimination rules also may discourage innovation and differentiation in broadband service offerings, as providers could avoid service offerings that may be perceived as discriminatory or having a differential impact on certain consumers or communities. Providers could also be reluctant to invest in new technologies or platforms that, while improving broadband service quality or availability, might also create disparities in service characteristics among consumers or areas. As FCC Commissioner Brendan Carr has noted:[91]
Another telling last minute addition is a new advisory opinion process. This is the very definition of swapping out permissionless innovation for a mother-may-I pre-approval process. What’s more? The FCC undermines whatever value that type of process could provide because, to the extent the FCC does—at some point in the future—authorize your conduct, the Order says that the agency reserves the right to rescind an advisory opinion at any time and on a moment’s notice. At that time, the covered provider “must promptly discontinue” the practice or policy. That does not provide the confidence necessary to invest and innovate.
Private, public, and nonprofit entities may even face allegations of intentional discrimination for policies and practices designed to increase internet adoption and use by protected groups. In particular, programs intended to increase broadband adoption among low-income and price-sensitive consumers could run afoul of the digital-discrimination rules. George Ford provides an example of such a program:[92]
For example, Cox Communications offers 100 Mbps broadband service for $49.99 per month, but ACP eligible households can get the same service for $30 per month. Higher-income households may not avail themselves of the discounted price.
In Tennessee, Hamilton County Schools’ EdConnect program offers free high-speed internet access to eligible students, where eligibility is based on income level—i.e., students who receive free or reduced-cost lunch, attend any school where every student receives free or reduced-cost lunch, or whose family participates in the Supplemental Nutrition Assistance Program (SNAP) or other economic-assistance programs.[93] Both the school district and the nonprofit that runs the program would also be covered entities. The fact that the price (free) is available only to those of a certain income level is explicit, intentional discrimination.
The FCC’s digital-discrimination rules will almost surely increase the regulatory burden and compliance costs for providers. Small and rural providers may be disproportionately burdened, as these providers tend to have more limited resources and face technical and economic challenges in deploying and maintaining broadband networks in unserved and underserved areas. The FCC’s proposal that broadband providers submit an annual report on their substantial broadband projects could likewise give larger providers an advantage, as they are more likely to have the resources to comply with this requirement. For example, the Wireless Internet Service Providers Association commented to the FCC:[94]
Annual reporting and record retention rules and the requirement to adopt and certify to the existence and compliance with an internal digital discrimination compliance plan would impose significant burdens on broadband providers, especially smaller providers that may not track investment data and lack the resources to develop a compliance program with ongoing obligations. The burdens are overly egregious given that smaller providers do not have any record of engaging in digital discrimination.
Further complicating the evaluation of digital-discrimination claims based on income is that, not only is income a key factor influencing whether a given consumer will adopt broadband, but it is also highly correlated with race, ethnicity, national origin, age, education level, and home-computer ownership and usage. The FCC’s digital-discrimination rules fail to recognize this “income conundrum” and will invite costly and time-consuming litigation based on allegations of digital discrimination either where it does not exist or where it is excused by economic-feasibility considerations. Moreover, by specifying pricing as an area subject to digital-discrimination scrutiny, the FCC’s rules allow for ex-post regulation of rates, prompting Commissioner Carr to characterize the agency’s digital-discrimination rules and Title II rules as “fraternal twins.”[95]
In 2015, the FCC issued the Open Internet Order (OIO), which reclassified broadband internet-access service as a telecommunications service subject to Title II of the Communications Act. Proponents of the OIO contend that the Title II classification was necessary to ensure net neutrality—that is, that internet service providers (ISP) would treat all internet traffic equally. In 2018, the Title II classification was repealed by the FCC’s Restoring Internet Freedom Order (RIFO).
One month after ICLE’s white paper was published in 2021, President Joe Biden issued an executive order that “encouraged” the FCC to “[r]estore Net Neutrality rules undone by the prior administration.” Last year, Anna Gomez was confirmed as an FCC commissioner, providing the commission a 3-2 Democratic majority. One day after her confirmation, FCC Chair Rosenworcel announced the agency’s proposal to reimpose Title II regulation on internet services. Soon thereafter, the FCC issued its “Notice of Proposed Rulemaking for the Safeguarding and Securing the Open Internet Order,” which would again reclassify broadband under Title II.[96] On April 25, 2024, the commission approved the order on a 3-2 party-line vote.[97]
While the FCC provides several reasons for reclassifying broadband, most of the justifications are built on the same underlying premise: That broadband is an essential public utility and should be regulated as such. Of course, many other essentials—shelter, food, clothing—are provided by various suppliers in competitive markets. Utilities are considered distinct because they tend to have significant economies of scale such that:
Under this definition, water, sewer, electricity, and natural gas constitute examples typically cited as “natural” monopolies.[99] In some cases, not only are these industries treated as regulated monopolies, but their monopoly status is solidified by laws forbidding competition.
At one time, local and long-distance telephone services were similarly treated as natural monopolies, as was cable television.[100] Various innovations eroded the “natural” monopolies in telephone and cable service over time.[101] As of the year 2000, 94% of U.S. households had a landline telephone, while only 42% had a mobile phone.[102] By 2018, those numbers flipped. In 2015, 73% of households subscribed to cable or satellite television service.[103] Today, fewer than half of U.S. households subscribe.[104] Much of that transition has been due to the enormous improvements in broadband speed, reliability, and affordability discussed in Section II. Similarly, innovations in 5G, fixed wireless, and satellite are eroding the already-tenuous claims that broadband internet service is akin to a utility.
The FCC’s latest reclassification of broadband under Title II prohibits blocking, throttling, or engaging in paid or affiliated prioritization arrangements.[105] In addition, it imposes “a general conduct standard that would prohibit unreasonable interference or unreasonable disadvantage to consumers or edge providers.” Under the OIO, the FCC invoked the general conduct standard to scrutinize providers’ “zero rating” programs.[106] Although Title II regulation explicitly allows for rate regulation of covered entities, the 2024 order forebears rate regulation.[107]
Critics of Title II regulation have argued that some of the conduct prohibited under the FCC’s proposal may be pro-competitive practices that benefit consumers. For example, Hyun Ji Lee & Brian Whitacre found that low-income consumers were willing to pay for an extra GB of data each month, but were not willing to pay extra for a higher speed.[108] This data-speed tradeoff suggests those consumers would benefit from a plan that offered a larger data allowance, but throttled speeds if the allowance is exceeded. In 2014 comments to the FCC, ICLE and TechFreedom described a pro-competitive benefit of paid prioritization:[109]
Prioritization at least requires content providers to respond to incentives—to take congestion into account instead of using up a common resource without regard to cost. It also allows the gaming company to buy better service, which isn’t an option at all with neutrality, under which it just has to suffer congestion. The truth is that, if the game developer can’t afford to pay for clear access, then it may have a bad business model if it is built on an expectation that it will have unfettered, free access to a scarce, contestable resource.
Aside from the likely pro-competitive effects of the conduct the FCC seeks to prohibit, in the face of robust competition, consumers can readily switch away from providers who charge anticompetitive prices or impose harmful terms and conditions. In its 2019 Mozilla decision, the U.S. Circuit Court of Appeals for the D.C. Circuit concluded:[110]
[M]any customers can access edge provider’s content from multiple sources (i.e., fixed and mobile). In this way, there is no terminating monopoly. Additionally, the Commission argued that even if a terminating monopoly exists for some edge providers the commenters did not offer sufficient evidence in the record to demonstrate that the resulting prices will be inefficient. Given these reasons, we reject Petitioners’ claim that the Commission’s conclusion on terminating monopolies is without explanation.
In addition, the court noted:[111]
More importantly, the Commission contends that low churn rates do not per se indicate market power. Instead, they could be a function of competitive actions taken by broadband providers to attract and retain customers. And such action to convince customers to switch providers, the Commission argues, is indicia of material competition for new customers.
Regardless of the FCC’s intent in imposing Title II regulation, the effect will be a stifling of innovation in the delivery and pricing of broadband-internet service. In tandem with the agency’s digital-discrimination rules, the proposed “net neutrality” rules attempt to transition broadband to a commodity service with little differentiation between providers. In so doing, the FCC is eliminating, piece-by-piece, the dimensions among which broadband providers compete, resulting in both higher prices for consumers and lower returns for providers. Rather than a “virtuous cycle” of growth and innovation, the U.S. broadband market may instead experience a “doom loop” of stagnant internet adoption, depressed investment in deployment, and diminished broadband competition.
Rate regulation—any mechanism whereby government intervenes in the pricing process—has long been a contentious issue in the realm of broadband services.[112] Historically, the FCC has been deeply involved in rate regulation, tasked with ensuring fair rates, reliable service, and universal access to telecommunications since 1934.[113] As the telecommunications landscape has evolved, however, so too has the FCC’s approach, increasingly moving toward deregulatory approaches. That is, until recently.[114] Unfortunately, there are multiple ways that rates can be regulated, and—despite public disavowals—policymakers already appear to be implementing some forms of rate regulation on broadband providers.
Explicit rate regulation manifests primarily in two forms: price ceilings and floors.[115] Price ceilings limit the maximum price that can be charged, a common example being rent control. Price floors, on the other hand, set a minimum price, akin to minimum wage laws. Each of these forms impacts the broadband sector differently, potentially altering market dynamics and influencing consumer access and provider revenues.[116]
Policymakers can also resort to less-obvious means of regulating prices—de-facto rate regulation—such as rent stabilization or inflation-linked wage increases, which control the rate of price changes rather than the prices themselves.[117] Moreover, as discussed further infra, price controls are sometimes introduced laterally as requirements to participate in various federal programs, with the effect remaining that government agents assume broad control over prices. Still other regulations may not explicitly regulate rates, but act in much the same way as direct rate regulation, as explained by Jonathan Nuechterlein and Howard Shelanski:[118]
Finally, but no less important, the line between “price” and “non-price” regulation is thin, and regulatory obligations can amount to rate regulation even when regulators do not perceive themselves as setting rates at either the retail or wholesale level.
The FCC’s 2015 OIO, while explicitly eschewing rate regulation, indirectly influenced pricing strategies in the broadband market.[119] By imposing common-carriage obligations, the OIO impacted how ISPs invested and priced their services. In this respect, the FCC’s 2024 rules are identical to the 2015 rules. But this time, Title II regulation will work hand-in-hand with the agency’s digital-discrimination rules. While the proposed common-carrier rules explicitly eschew ex-ante rate regulation through forbearance, the digital-discrimination rules explicitly subject pricing policies and practices to ex-post discrimination scrutiny.
In some ways, the FCC may be imposing among the worst of possible rate-regulation regimes. Under an ex-ante approach to rate regulation, providers have—at a minimum—a framework to form their expectations about whether and how rates will be regulated. As discussed in Section III.C, however, under the ex-post approach that the FCC has adopted in its digital-discrimination rules, providers and any other “covered entity” lack any meaningful framework regarding how the agency may regulate rates or how to avoid liability.
Specifically, the FCC’s Digital Discrimination Order states:
The Commission need not prescribe prices for broadband internet access service, as some commenters have cautioned against, in order to determine whether prices are “comparable” within the meaning of the equal access definition. The record reflects support for the Commission ensuring pricing consistency as between different groups of consumers. We also find that the Commission is well situated to analyze comparability in pricing, as we must already do so in other contexts.[120]
While assessing the comparability of prices is not explicit rate regulation, a policy that holds entities liable for those disparities, such that an ISP must adjust its prices until it matches the FCC definitions of “comparable” and “consistency,” is tantamount to setting that rate.[121]
In addition to the FCC digital-discrimination and Title II rules, recent developments in broadband policy have introduced other forms of de-facto rate regulation. The BEAD program itself mandates a “low-cost” option be made available to recipients of the Affordable Connectivity Program by providers that receive a BEAD grant.[122] The NTIA’s NOFO for the BEAD program further mandates that participating states include an affordability plan that ensures access to affordable high-speed internet for all middle-class consumers.[123] This initiative might require providers to offer low-cost plans or to provide consumer subsidies. Similarly, the U.S. Department of Agriculture’s (USDA) ReConnect Loan and Grant Program awards funding preferences to applicants that adhere to net-neutrality rules and offer “affordable” options.[124] New York’s Affordable Broadband Act is another example of broadband rules that mandate ISPs provide low-cost internet-access plans to qualifying low-income households.[125]
Rate regulation, de facto or otherwise, has a major effect on providers’ ability to enter new markets and to improve service in those markets in which they already operate. Rate regulations lead to market distortions. By capping prices below the market rate, such regulations can increase demand without a corresponding increase in supply, potentially leading to shortages and discouraging providers from making output-improving investments.[126] For broadband providers, this can translate into reduced investment in network expansion and quality improvement, particularly in less profitable or more challenging areas. Moreover, binding rate regulations can lower the returns on investment, thereby discouraging deployments and slowing overall broadband expansion. Quality and service also may suffer under rate regulation. A regulated provider, constrained by price ceilings, cannot fully reap the benefits of service-quality improvements, leading to a reduced incentive to enhance that service quality.[127]
The importance of pole attachments cannot be overstated in the context of expanding broadband connectivity, even if utility-pole issues often fly under the radar. This is particularly true due to their implications for competition in the relevant local broadband markets. Access to physical infrastructure is critical, and where providers cannot readily access this physical infrastructure, it can delay deployment or make it more costly.
The FCC has recognized the crucial role of pole attachments in a pending proceeding that seeks to address inefficiencies in access to pole attachments that lead to cost overruns and delays in deployment.[128] In December 2023, in an effort to expedite broadband deployment, the commission adopted several important pole-attachment reform measures.[129] These included introducing a streamlined process to resolve utility-pole attachment disputes, which could be pivotal to hasten broadband rollouts, especially in underserved areas.[130] The FCC also mandated that utilities provide comprehensive pole-inspection information to broadband attachers, which is expected to facilitate more informed planning and to reduce delays.[131] The commission has also refined its procedural rules to foster quicker resolutions through mediation and expedited adjudication via the Accelerated Docket.[132]
The FCC is on the right track: ensuring timely access to pole infrastructure is crucial to ensure that broadband markets remain competitive, and that the substantial investments in broadband infrastructure directed by programs like BEAD yield the intended benefits.
The goal of pole-attachment rules should be to equitably assess costs in ways that avoid inefficient rent extraction and ensure the smooth deployment of broadband infrastructure.[133] The FCC’s current rules, however, can impose on a requesting attacher the entire cost of pole replacement, which is economically suboptimal.[134] There is therefore a need to revisit the current formula to ensure that the incremental costs and benefits are appropriately allocated to each relevant party. In its recent order, the FCC expanded the definition of what constitutes as a “red tagged” pole in need of replacement.[135] The extent to which this works in practice will, however, depend on how the FCC processes applications under its new “red tag” policy.
One critical concern is the emergence of hold-up and hold-out problems.[136] Section 224 of the Communications Act authorizes the FCC to ensure that the costs of pole attachments are just and reasonable.[137] This provision, however, also allows pole owners to deny access when there is insufficient capacity, creating a potential imbalance in bargaining power.[138] This imbalance is exacerbated by the pole owners’ superior knowledge of their cost structures and their ability to impose “take it or leave it” offers on prospective attachers.[139] Consequently, attachers might be, at the margin, discouraged from deploying in areas with capacity-constrained poles. Further, the “last attacher pays” model can inadvertently create a disincentive for pole owners to replace or upgrade poles until a new attacher is obligated to bear the full cost. This scenario may lead to delays in broadband deployment, especially in areas where the cost of deployment is already high. The recent FCC order aims to address these concerns by clarifying cost-causation principles and ensuring more equitable cost sharing for pole replacements and modifications.[140] But there again remains interpretive room within the framework the commission has established. Thus, it remains to be seen how effectively the new rules will mitigate the problem.
Any reconsideration of pole-attachment rules also must account for the fact that the pole market is highly regulated.[141] The actual cost for pole replacements in a free market, without regulatory intervention, would likely be some middle ground between the total replacement cost and the new rental price charged to attachers. The FCC must judiciously leverage its ability to set reasonable rental rates to approach the ideal price that would otherwise be discovered through market mechanisms.
Toward this end, the upfront “make-ready” charges for pole replacement should be limited to a pole owner’s incremental cost.[142] This approach acknowledges that early replacements simply shift the timing of the expense, rather than adding additional costs. The formula could incorporate the depreciated value of the pole being replaced and allocate the costs associated with increased capacity across all beneficiaries, including new attachers as well as the pole owner, who may realize additional revenue from the increased capacity.
Beyond disputes over privately owned poles, a lacuna in the FCC’s authority over poles owned by certain public entities threatens to erect large roadblocks to deployment. This is particularly the case for poles owned by the Tennessee Valley Authority (TVA).[143] Such common TVA practices as refusing reasonable and nondiscriminatory pole-attachment agreements risk significantly slowing the deployment of broadband, especially in the rural areas the TVA services.[144]
The source of this problem is a provision of Section 224 of the Communications Act that exempts municipal and electric-cooperative (coop) pole owners from FCC oversight.[145] This exemption allows the TVA to set its own rates for pole attachments, which are notably higher than FCC rates, and often sidestep access requirements typically mandated by states and the FCC.[146]
Municipally owned electricity distributors constitute what economists call state-owned enterprises. As such, they face significantly different restraints than privately owned enterprises.[147] Private businesses must pass the profit-and-loss test on the market, while state-owned enterprises are not similarly constrained. Municipally owned electricity distributors are usually monopolies, either because private competitors are not allowed to compete, or because they receive government benefits not available to potential private competitors. As a result, they may pursue other goals in the “public interest,” such as providing their products and services at below-market prices.[148] This includes the ability to leverage their electricity monopolies to enter into broadband provision. The problem is that these municipally owned electricity distributors also have strong incentives to refuse to deal with private competitors in the broadband market who need access to the electric poles they own.[149]
Rural electric cooperatives (RECs), particularly those distributing electricity from the TVA, also hold a privileged position that allows them to act in potentially anticompetitive ways toward broadband providers seeking pole attachments. Unlike municipally owned electricity distributors, RECs need to earn sufficient revenues to remain operational. They are also, however, much more like state-owned enterprises in the governmental benefits they receive, including the immense difficulty of normal oversight from the market for corporate control.[150] This similarly incentivizes them to act anticompetitively, particularly as many enter or plan to enter the broadband market.[151]
These circumstances often lead RECs to refuse to deal with private broadband providers, thereby stifling competition and deployment in rural areas.[152] Furthermore, RECs often face little oversight from rate regulators regarding pole attachments, leading to significantly higher costs for broadband companies seeking to attach to poles owned by co-ops and municipalities outside FCC jurisdiction.[153]
This regulatory loophole not only leads to higher costs for broadband providers, but also raises concerns about the application of antitrust laws to these entities. Sen. Mike Lee (R-Utah) has argued that the U.S. Justice Department (DOJ) should examine the antitrust implications of these practices, emphasizing that these government-owned entities should be subject to antitrust laws when acting as market participants.[154] And FCC Commissioner Brendan Carr has noted ongoing concerns about delays and costs associated with attaching to poles owned by municipal and cooperative utilities.[155] Addressing this loophole is crucial to bridge the digital divide and ensure that the IIJA’s goals are met effectively.
As previously noted, despite persistent interest in some quarters to promote municipal broadband,[156] there are many challenges that contribute to such projects’ poor record. In particular, the financial prospects of municipal networks are typically dim, as many such projects generate negative cash flow and are unsustainable without substantial improvements in operations.[157] Only a small subset of municipalities—usually those with existing municipal-power utilities—might be well-positioned to venture into municipal broadband, due to potential cross-subsidization opportunities.[158] Even among those municipal-broadband projects that have been deemed successful, however, the repayment of project costs is daunting, often requiring substantial subsidies and cross-subsidization.[159] The prospects for municipal broadband have not improved since ICLE’s 2021 white paper.
In a study by Christopher Yoo et al., the authors examine the financial performance of every municipal fiber project operating in the United States from 2010 through 2019 that provided annual financial reports for its fiber operations.[160] Each of the 15 projects was located in an urban area, as defined by the U.S. Census Bureau. In addition, each project was built in areas already served by one or more private broadband providers—none were designed to serve previously unserved areas. In every case, the municipality issued revenue bonds to fund construction and initially expected the projects to repay their construction and operating costs from project revenues, rather than from taxes or interfund transfers. In some cases, the cities anticipated the projects would generate surpluses that would, in turn, allow the cities to lower taxes.
In contrast to these expectations, every project either needed infusions of cash from outside sources or debt relief through refinancing. Three projects defaulted on their debt, two of which were liquidated at significant losses.
Yoo et al. employed two measures of financial performance:
Based on ANCF, only two of the 15 projects have broken even or are expected to break even by the time their initial debt matures. Based on NPV, more than half of the projects were not on track to break even—even assuming a theoretical best-case performance in terms of capital expenditures and debt service.
Municipalities that are unable to cover their broadband projects’ costs of debt and operations must make up the shortfall from general tax revenues or default on their debt. Making up a shortfall from tax revenues means the city must enact some combination of tax increases or service cuts. A default will result in a downgrade in the municipality’s bond rating, which will increase the costs of financing all of the city’s operations, not just the broadband project. These additional costs must ultimately be paid the municipality’s taxpayers.
In a separate analysis, George Ford notes that many municipal-broadband projects are located in cities that operate their own electric utilities.[161] Such an arrangement allows the broadband network’s debt and other expenses to be placed on the electric utility’s books, thereby improving the apparent financial condition of the broadband network. As electricity rates are based on cost of service, Ford argues that a shift of broadband costs to the electric utility would be expected to increase electricity rates.
To evaluate this hypothesis, he compares municipal electricity rates among four Tennessee cities that own and operate municipal broadband. Two cities financed the projects with general-obligation bonds funded by tax revenues and other sources of the municipality’s income. The other two cities used electric-utility profits to cover the broadband project’s financial losses. One of these cities is Chattanooga, which received $111 million in subsidies and in which the city’s electric utility assumed $162 million of debt to construct the broadband network and made $50 million of loans to the broadband division.
Ford’s statistical analysis calculates broadband projects are associated with a 5.4% increase in electricity rates in cities with utility-funded projects, relative to cities that issued general-obligation bonds. It should be emphasized that the higher rates are imposed on all electricity ratepayers, not just those who subscribe to the city’s broadband. These higher electricity rates are used to cross-subsidize municipal-broadband subscribers. For example, Ford reports that, in Chattanooga, the average monthly revenue per broadband subscriber was $147 in 2015. In addition, the average subscriber was associated with a monthly subsidy of $30. Thus, cross-subsidies from electricity ratepayers account for about 17% of the average monthly broadband-subscriber cost.
The conclusions from ICLE’s 2021 white paper remain valid today. Proposals to offer municipal broadband as a means to increase broadband adoption—either by attempting to increase supply, or to suppress prices—put the cart before the horse. That’s because private supply and demand conditions are usually sufficient to guarantee creation of adequate broadband networks throughout most of the country.
Some uneconomic locations (i.e., the unserved areas) may require interventions to ensure broadband access. In some cases, municipal broadband may be an effective option to subsidize hard-to-reach consumers. Municipal broadband should not, however, be considered the best or only option. Indeed, the evidence demonstrates that municipal broadband might best be considered a solution of last resort, used only when no private provider finds it economically viable to serve a particular area.
By most measures, U.S. broadband competition is vibrant and has increased dramatically since the COVID-19 pandemic. Since 2021, more households are connected to the internet; broadband speeds have increased, while prices have declined; more households are served by more than a single provider, and new technologies like satellite and 5G have expanded internet access and intermodal competition among providers.
Broadband competition policy currently appears to be in a state of confusion: Some policies foster competition, while others hinder it. Programs such as the ACP and BEAD could do much to encourage competition by simultaneously increasing the demand for broadband and facilitating the buildout of supply. At the same time, some facets of these programs’ implementation act to stifle competition with onerous rules, reporting requirements, and—in some cases—de-facto rate regulation.
In addition, the FCC’s digital-discrimination rules explicitly subject broadband pricing and other dimensions of competition to ex-post scrutiny and enforcement. In reclassifying broadband internet-access services under Title II of the Communications Act, the FCC has rendered nearly every aspect of broadband deployment and delivery subject to its regulation or scrutiny.
Put simply, today, U.S. broadband competition is robust, innovative, and successful. At the same time, new and forthcoming regulations threaten broadband competition by eliminating or proscribing the policies and practices by which providers compete. As a result, the United States is at risk of slowing or shrinking broadband investment—thereby reducing innovation and harming the very consumers that policymakers claim they seek to help.
[1] Geoffrey A. Manne, Kristian Stout, & Ben Sperry, A Dynamic Analysis of Broadband Competition: What Concentration Numbers Fail to Capture, Int’l Ctr. for L. & Econ. (Jun. 2021), available at https://laweconcenter.org/wp-content/uploads/2021/06/A-Dynamic-Analysis-of-Broadband-Competition.pdf.
[2] See id. at 2-3; 35-37.
[3] CDC Museum COVID-19 Timeline, Ctr. for Disease Control and Prevention (Mar. 15, 2023), https://www.cdc.gov/museum/timeline/covid19.html.
[4] H.R. 3684, 117th Cong. (2021).
[5] Eric Fruits & Kristian Stout, Finding Marginal Improvements for the ‘Good Enough’ Affordable Connectivity Program, Int’l Ctr. for L. & Econ. (Sep. 15, 2023), available at https://laweconcenter.org/wp-content/uploads/2023/09/ACP-Subsidies-Paper.pdf.
[6] Eric Fruits & Geoffrey A. Manne, Quack Attack: De Facto Rate Regulation in Telecommunications, Int’l Ctr. for L. & Econ. (Mar. 30, 2023), available at https://laweconcenter.org/wp-content/uploads/2023/03/De-Facto-Rate-Reg-Final-1.pdf.
[7] Eric Fruits & Kristian Stout, The Income Conundrum: Intent and Effects Analysis of Digital Discrimination, Int’l Ctr. for L. & Econ. (Nov. 14, 2022), available at https://laweconcenter.org/wp-content/uploads/2022/11/The-Income-Conundrum-Intent-and-Effects-Analysis-of-Digital-Discrimination.pdf.
[8] Wireline Competition Bureau Announces the Final Month of the Affordable Connectivity Program, WC Docket No. 21-450 (Mar. 4, 2024), available at https://docs.fcc.gov/public/attachments/DA-24-195A1.pdf; see also Brian Fung, FCC Ends Affordable Internet Program Due to Lack of Funds, CNN (May 31, 2024), https://www.cnn.com/2024/05/31/tech/fcc-affordable-connectivity-program-acp-close/index.html.
[9] Anthony Hennen, More Money, More Problems for National Broadband Expansion, The Center Square (Aug. 15, 2023), https://www.thecentersquare.com/pennsylvania/article_3124e98c-3bb3-11ee-ad87-7361f3872110.html.
[10] Lindsay McKenzie, BEAD Waiver Information Coming This Summer, NTIA Says, StateScoop (Aug. 17, 2023), https://statescoop.com/bead-broadband-waiver-summer-2023-ntia.
[11] BEAD Letter of Credit Concerns, $4.3M in ACP Outreach Grants, FCC Waives Rules for Hawaii Wildfires, Broadband Breakfast (Aug. 21, 2023), https://broadbandbreakfast.com/2023/08/bead-letter-of-credit-concerns-4-3m-in-acp-outreach-grants-fcc-waives-rules-for-hawaii-wildfires.
[12] Eric Fruits, Red Tape and Headaches Plague BEAD Rollout, Truth on the Market (Aug. 17, 2023), https://truthonthemarket.com/2023/08/17/red-tape-and-headaches-plague-bead-rollout.
[13] Fruits & Stout, supra note 6; see also Eric Fruits, Kristian Stout, & Ben Sperry, ICLE Reply Comments on Prevention and Elimination of Digital Discrimination, Notice of Proposed Rulemaking, In the Matter of Implementing the Infrastructure, Investment, and Jobs Act: Prevention and Elimination of Digital Discrimination, No. 22-69, at Part III, Int’l Ctr. for L. & Econ. (Apr. 20, 2023), https://laweconcenter.org/resources/icle-reply-comments-on-prevention-and-elimination-of-digital-discrimination.
[14] FCC, Report and Order and Further Notice of Proposed Rulemaking on Implementing the Infrastructure Investment and Jobs Act: Prevention and Elimination of Digital Discrimination, GN Docket No. 18-238, FCC 19-44 (Nov. 20, 2023), available at https://docs.fcc.gov/public/attachments/FCC-23-100A1.pdf [hereinafter “Digital Discrimination Order”]. See also Eric Fruits, Everyone Discriminates Under the FCC’s Proposed New Rules, Truth on the Market (Oct. 30, 2023), https://truthonthemarket.com/2023/10/30/everyone-discriminates-under-the-fccs-proposed-new-rules (reporting that, under the rules, “broadband service” includes every element of a consumer’s broadband-internet experience, including speeds, data caps, pricing, and discounts, and that the rules broadly apply to broadband providers as well as to “entities outside the communications industry” that “provide services that facilitate and affect consumer access to broadband,” which may include municipalities and property owners).
[15] Notice of Proposed Rulemaking, Safeguarding and Securing the Open Internet, WC Docket No. 23-320 (Sep. 28, 2023). [hereinafter “Title II NPRM”]
[16] Declaratory Ruling, Order, Report and Order, and Order on Reconsideration, Safeguarding and Securing the Open Internet, WC Docket No. 23-320, WC Docket No. 17-108 (adopted Apr. 25, 2024), available at https://docs.fcc.gov/public/attachments/DOC-401676A1.pdf [hereinafter “SSOIO” or “2024 Order”].
[17] See, e.g., Karl Bode, Colorado Eyes Killing State Law Prohibiting Community Broadband Networks, TechDirt (Mar. 30, 2023), https://www.techdirt.com/2023/03/30/colorado-eyes-killing-state-law-prohibiting-community-broadband-networks (local broadband monopolies are a “widespread market failure that’s left Americans paying an arm and a leg for what’s often spotty, substandard broadband access.”).
[18] FCC Chair Rosenworcel on Reinstating Net Neutrality Rules, C-Span (Sep. 25, 2023), https://www.c-span.org/video/?530731-1/fcc-chair-rosenworcel-reinstating-net-neutrality-rules (“Only one-fifth of the country has more than two choices at [100 Mbps download] speed. So, if your broadband provider mucks up your traffic, messes around with your ability to go where you want and do what you want online, you can’t just pick up and take your business to another provider. That provider may be the only game in town.”).
[19] U.S. Census Bureau, 2021 American Community Survey 1-Year Estimates, Table Id. S2801 (2021); U.S. Census Bureau, ACS 1-Year Estimates Public Use Microdata Sample 2021, Access to the Internet (ACCESSINET) (2021).
[20] In contrast, a 2021 NTIA survey reports that 14.4% of households do not use the internet at home, with three-quarters of these households indicating they have “no need/interest” and one quarter indicating it is “too expensive.” See, Michelle Cao & Rafi Goldberg, Switched Off: Why Are One in Five U.S. Households Not Online?, National Telecommunications and Information Administration (2022), https://ntia.gov/blog/2022/switched-why-are-one-five-us-households-not-online.
[21] National Center for Education Statistics, Children’s Internet Access at Home, Condition of Education, (U.S. Department of Education, Institute of Education Sciences, Aug. 2023), https://nces.ed.gov/programs/coe/indicator/cch.
[22] See FCC, 2015 Broadband Progress Report (2015), https://www.fcc.gov/reports-research/reports/broadband-progressreports/2015-broadband-progress-report (upgrading the standard speed from 4/1 Mbps to 25/3 Mbps). In March 2024, the FCC approved a report increasing the fixed-speed benchmark to 100/20 Mbps and setting an “aspirational goal” of 1 Gbps/500 Mbps. See, FCC, In the Matter of Inquiry Concerning the Deployment of Advanced Telecommunications Capability to All Americans in a Reasonable and Timely Fashion, GN Docket No. 22-270 (Mar. 14, 2024), available at https://docs.fcc.gov/public/attachments/DOC-400675A1.pdf. In November 2023, FCC Chair Jessica Rosenworcel proposed reaching a 1 Gbps/500 Mbps benchmark by the year 2030. See Eric Fruits, Gotta Go Fast: Sonic the Hedgehog Meets the FCC, Truth on the Market (Nov. 3, 2023), https://truthonthemarket.com/2023/11/03/gotta-go-fast-sonic-the-hedgehog-meets-the-fcc.
[23] Infrastructure Investment and Jobs Act, Pub. L. No. 117-58, § 60102 (a)(1)(A)(ii), 135 Stat. 429 (Nov. 15, 2021), available at https://www.congress.gov/117/plaws/publ58/PLAW-117publ58.pdf; Jake Varn, What Makes a Community “Unserved” or “Underserved” by Broadband?, Pew Charitable Trusts (May 3, 2023), available at https://www.pewtrusts.org/-/media/assets/2023/06/un–and-underserved-definitions-ta-memo-pdf.pdf.
[24] Id., IIJA.
[25] Mike Conlow, New FCC Broadband Map, Version 3, Mike’s Newsletter (Nov. 20, 2023), https://mikeconlow.substack.com/p/new-fcc-broadband-map-version-3.
[26] FCC, Communications Marketplace Report, GN Docket No 22-203, FCC 22-103, Appendix G (Dec. 20, 2022), https://www.fcc.gov/document/2022-communications-marketplace-report.
[27] Pursuant to the IIJA, the FCC and providers are working to provide new broadband-coverage maps. These numbers will change over time, but FCC Chair Jessica Rosenworcel noted: “Looking ahead, we expect that any changes in the number of locations will overwhelmingly reflect on-the-ground changes such as the construction of new housing.” See Brad Randall, FCC’s Updated Broadband Map Shows Increasing National Connectivity, Broadband Communities (Nov. 27, 2023), https://bbcmag.com/fccs-new-broadband-map-shows-increasing-national-connectivity.
[28] FCC Chair Rosenworcel on Reinstating Net Neutrality Rules, C-Span (Sep. 26, 2023), https://www.c-span.org/video/?530731-1/fcc-chair-rosenworcel-reinstating-net-neutrality-rules.
[29] FCC, Fixed Broadband Deployment (Jun. 2021), https://broadband477map.fcc.gov/#/area-summary?version=jun2021&type=nation&geoid=0&tech=acfw&speed=25_3&vlat=27.480205324799257&vlon=-41.52925368904516&vzoom=5.127403622197149.
[30] FCC, 2019 Broadband Deployment Report, GN Docket No. 18-238, FCC 19-44 at Fig. 4 (May 29, 2019), available at https://docs.fcc.gov/public/attachments/FCC-19-44A1.pdf.
[31] The FCC does not explain the differences between the information summarized in Table 1 and Table 2. The differences likely reflect different methodologies. For example, Table 1 may be at the household level and Table 2 at the population level.
[32] 2022 Communications Marketplace Report, GN Docket No. 22-203 (Dec. 30, 2022) at Fig. II.A.28, available at https://docs.fcc.gov/public/attachments/FCC-22-103A1.pdf.
[33] Dan Heming, Starlink No Longer Has a Waitlist for Standard Service, and 10 MPH Speed Enforcement Update, Mobile Internet Resource Center (Oct. 3, 2023), https://www.rvmobileinternet.com/starlink-no-longer-has-a-waitlist-for-standard-service-and-10-mph-speed-enforcement-update/#:~:text=In%20the%20latest%20update%2C%20the,order%20anywhere%20in%20the%20USA.
[34] Starlink Specifications, Starlink, https://www.starlink.com/legal/documents/DOC-1400-28829-70.
[35] Amazon Shares an Update on How Project Kuiper’s Test Satellites Are Performing, Amazon (Oct. 16, 2023), https://www.aboutamazon.com/news/innovation-at-amazon/amazon-project-kuiper-test-satellites-space-launch-october-2023-update.
[36] Kuiper Service to Start by End of 2024: Amazon, Communications Daily (Oct. 12, 2023), https://communicationsdaily.com/news/2023/10/12/Kuiper-Service-to-Start-by-End-of-2024-Amazon-2310110007.
[37] Why Is the Internet More Expensive in the USA than in Other Countries?, Community Tech Network (Feb. 2, 2023), https://communitytechnetwork.org/blog/why-is-the-internet-more-expensive-in-the-usa-than-in-other-countries.
[38] Dan Howdle, Global Broadband Pricing League Table 2023, Cable.co.uk (2023), https://www.cable.co.uk/broadband/pricing/worldwide-comparison, data available at https://www.cable.co.uk/broadband/worldwide-pricing/2023/broadband_price_comparison_data.xlsx.
[39] This is qualitatively consistent with the FCC’s finding that United States has the seventh-lowest prices per gigabit of data consumption, and that Australia has the 12th-lowest among OECD countries. FCC, 2022 Communications Marketplace Report, Docket No. 22-103, Appendix G (Dec. 30, 2022), available at https://docs.fcc.gov/public/attachments/FCC-19-44A1.pdf.
[40] Median Country Speeds, Speedtest Global Index (Oct. 2023), https://www.speedtest.net/global-index (last visited Dec. 7, 2023).
[41] See Christian Dippon, et al., Adding a Warning Label to Rewheel’s International Price Comparison and Competitiveness Rankings (Nov. 30, 2020), available at https://laweconcenter.org/wp-content/uploads/2020/11/Rewheel_Review_Final.pdf.
[42] Fruits & Stout, supra note 6; see also Giuseppe Colangelo, Regulatory Myopia and the Fair Share of Network Costs: Learning from Net Neutrality’s Mistakes, Int’l Ctr. for L. & Econ. (Comments to European Commission Exploratory Consultation, The Future of the Electronic Communications Sector and Its Infrastructure, May 18, 2023), https://laweconcenter.org/resources/regulatory-myopia-and-the-fair-share-of-network-costs-learning-from-net-neutralitys-mistakes.
[43] Id. at 14.
[44] Arthur Menko Business Planning Inc., 2023 Broadband Pricing Index, USTelecom (Oct. 2023), available at https://ustelecom.org/wp-content/uploads/2023/10/USTelecom-2023-BPI-Report-final.pdf.
[45] U.S. Bureau of Labor Statistics, Producer Price Index by Commodity: Telecommunication, Cable, and Internet User Services: Residential Internet Access Services [WPU374102], retrieved from FRED, Federal Reserve Bank of St. Louis (Aug. 29, 2023), https://fred.stlouisfed.org/series/WPU374102.
[46] United States Median Country Speeds July 2023, Speedtest Global Index (2023), https://www.speedtest.net/global-index/united-states. Prior years retrieved from Internet Archive. See also Camryn Smith, The Average Internet Speed in the U.S. Has Increased by Over 100 Mbps since 2017, Allconnect (Aug. 4, 2023), https://www.allconnect.com/blog/internet-speeds-over-time (average download speed in the United States was 30.7 Mbps in 2017 and 138.9 Mbps in the first half of 2023).
[47] George S. Ford, Confusing Relevance and Price: Interpreting and Improving Surveys on Internet Non-adoption, 45 Telecomm. Pol’y 102084 (2021).
[48] Smaller surveys and focus groups that allow more opportunities for follow-up questions, however, suggest that price may be more important than is suggested by Census Bureau surveys. For example, one study in Detroit, Michigan, used surveys and focus groups to examine internet adoption and use in three low-income urban neighborhoods. Participants who reported lacking at-home internet mentioned lack of interest and high costs at roughly equal rates. See, Colin Rhinesmith, Bianca Reisdorf, & Madison Bishop, The Ability to Pay For Broadband, 5 Comm. Res. Pract. 121 (2019).
[49] Ford, supra note 9.
[50] Michelle Cao & Rafi Goldberg, New Analysis Shows Offline Households Are Willing to Pay $10-a-Month on Average for Home Internet Service, Though Three in Four Say Any Cost Is Too Much, National Telecommunications and Information Administration (Oct. 6, 2022), https://ntia.gov/blog/2022/new-analysis-shows-offline-households-are-willing-pay-10-month-average-home-internet.
[51] Michelle Cao & Rafi Goldberg, Switched Off: Why Are One in Five U.S. Households Not Online?, National Telecommunications and Information Administration (2022), https://ntia.gov/blog/2022/switched-why-are-one-five-us-households-not-online.
[52] Jamie Greig & Hannah Nelson, Federal Funding Challenges Inhibit a Twenty-First Century “New Deal” for Rural Broadband, 37 Choices 1 (2022).
[53] Andrew Perrin, Mobile Technology and Home Broadband 2021, Pew Research Center (Jun. 3, 2021), https://www.pewresearch.org/internet/2021/06/03/mobile-technology-and-home-broadband-2021.
[54] Rhinesmith, et al., supra note 10.
[55] 2022 Broadband Capex Report, USTelecom (Sep. 8, 2023), available at https://ustelecom.org/wp-content/uploads/2023/09/2022-Broadband-Capex-Report-final.pdf.
[56] Wolfgang Briglauer, Carlo Cambini, Klaus Gugler, & Volker Stocker, Net Neutrality and High-Speed Broadband Networks: Evidence from OECD Countries, 55 Eur. J. L. & Econ. 533 (2023).
[57] Eric Fruits, Justin (Gus) Hurwitz, Geoffrey A. Manne, Julian Morris, & Alec Stapp, Static and Dynamic Effects of Mergers: A Review of the Empirical Evidence in the Wireless Telecommunications Industry, (OECD Directorate for Financial and Enterprise Affairs Competition Committee, Global Forum on Competition, DAF/COMP/GF(2019)13, Dec. 6, 2019), available at https://one.oecd.org/document/DAF/COMP/GF(2019)13/en/pdf.
[58] Manne, Stout, & Sperry, supra note 1.
[59] Kenneth Flamm & Pablo Varas, Effects of Market Structure on Broadband Quality in Local U.S. Residential Service Markets, 12 J. Info. Pol’y 234 (2022).
[60] Andrew Kearns, Does Competition From Cable Providers Spur the Deployment of Fiber? (Jul. 27, 2023), https://ssrn.com/abstract=4523529 or http://dx.doi.org/10.2139/ssrn.4523529.
[61] Manne, Stout, & Sperry, supra note 1.
[62] Fruits, et al., supra note 55.
[63] FCC, Affordable Connectivity Program (Oct. 2, 2023), https://www.fcc.gov/acp.
[64] Eric Fruits & Kristian Stout, Finding Marginal Improvements for the ‘Good Enough’ Affordable Connectivity Program (Int’l. Ctr. for L. & Econ. Issue Brief, Sep. 15, 2023), available at https://laweconcenter.org/wp-content/uploads/2023/09/ACP-Subsidies-Paper.pdf.
[65] See Paul Winfree, Bidenomics Goes Online: Increasing the Costs of High-Speed Internet, Econ. Pol’y Innovation Ctr (Jan. 8, 2024), available at https://epicforamerica.org/wp-content/uploads/2024/01/Bidenomics-Goes-Online_01.08.24-1.pdf (Finding ACP subsidies are associated with higher prices for all broadband plans, especially lower-speed plans, but these costs are more than offset by the subsidies for those who receive them. Thus, the ACP provides lower prices net of subsidy to ACP beneficiaries, but higher prices for those who are not.).
[66] Id.
[67] Id.
[68] Fruits & Stout, supra note 4.
[69] Universal Service Administrative Co., ACP Enrollment and Claims Tracker (Feb. 8, 2024), https://www.usac.org/about/affordable-connectivity-program/acp-enrollment-and-claims-tracker. Beginning Feb. 8, 2024, the ACP ceased enrollment.
[70] Wireline Competition Bureau Announces the Final Month of the Affordable Connectivity Program, WC Docket No. 21-450 (Mar. 4, 2024), available at https://docs.fcc.gov/public/attachments/DA-24-195A1.pdf.
[71] Biden-Harris Administration Announces State Allocations for $42.45 Billion High-Speed Internet Grant Program as Part of Investing in America Agenda, Nat’l Telecomms and Info. Admin. (Jun. 26, 2023), https://www.ntia.gov/press-release/2023/biden-harris-administration-announces-state-allocations-4245-billion-high-speed.
[72] Id.
[73] U.S. Dep’t of Com., Internet For All Frequently Asked Questions and Answers Draft Answers Version 2.0 Broadband, Equity, Access, and Deployment (BEAD) Program, Nat’l Telecomms and Info. Admin. (Sep. 2022), available at https://broadbandusa.ntia.doc.gov/sites/default/files/2022-09/BEAD-Frequently-Asked-Questions-%28FAQs%29_Version-2.0.pdf.
[74] Infrastructure Investment and Jobs Act Overview, BroadbandUSA, https://broadbandusa.ntia.doc.gov/resources/grant-programs (last visited Dec. 7, 2023).
[75] U.S. Dep’t of Com., Notice of Funding Opportunity, Broadband Equity, Access, and Deployment Program, NTIA-BEAD-2022, Nat’l Telecomms and Info. Admin. (May 2022), available at https://broadbandusa.ntia.doc.gov/sites/default/files/2022-05/BEAD%20NOFO.pdf. [hereinafter “BEAD NOFO”]
[76] Id. See also, Ted Cruz, Red Light Report, Stop Waste, Fraud, and Abuse in Federal Broadband Funding, U.S. S. Comm. on Com., Science, and Transp. (Sep. 2023), https://www.commerce.senate.gov/services/files/0B6D8C56-7DFD-440F-8BCC-F448579964A3.
[77] U.S. Dep’t of Com., Notice of Funding Opportunity, Broadband Equity, Access, and Deployment Program, NTIA-BEAD-2022, NTIA (May 2022), available at https://broadbandusa.ntia.doc.gov/sites/default/files/2022-05/BEAD%20NOFO.pdf (note that the IIJA itself did not include this requirement, as it was an addition by NTIA as part of the NOFO process; thus, it is unclear the extent to which this represents a valid requirement by NTIA under the BEAD program).
[78] Id. at 67.
[79] George S. Ford, Middle-Class Affordability of Broadband: An Empirical Look at the Threshold Question, Phoenix Ctr. for Adv. Leg. & Econ. Pub. Pol’y Stud., Pol’y Bull. No. 61 (Oct. 2022), available at https://phoenix-center.org/PolicyBulletin/PCPB61Final.pdf.
[81] John W. Mayo, Gregory L. Rosston & Scott J. Wallsten, From a Silk Purse to a Sow’s Ear? Implementing the Broadband, Equity, Access and Deployment Act, Geo. U. McDonough Sch. of Bus. Ctr. for Bus. & Pub. Pol’y (Aug. 2022), https://georgetown.app.box.com/s/yonks8t7eclccb0fybxdpy3eqmw1l2da?mc_cid=95d011c7c1&mc_eid=dc30181b39.
[82] BEAD Letter of Credit Concerns, $4.3M in ACP Outreach Grants, FCC Waives Rules for Hawaii Wildfires, Broadband Breakfast (Aug. 21, 2023), https://broadbandbreakfast.com/2023/08/bead-letter-of-credit-concerns-4-3m-in-acp-outreach-grants-fcc-waives-rules-for-hawaii-wildfires.
[83] NTIA, Ensuring Robust Participation in the BEAD Program (Nov. 1, 2023), https://www.internetforall.gov/blog/ensuring-robust-participation-bead-program.
[84] FCC, Report and Order and Further Notice of Proposed Rulemaking, GN Docket No. 22-69, FCC 23-100 (Nov. 20, 2023), available at https://docs.fcc.gov/public/attachments/FCC-23-100A1.pdf
[85] Id. at 3.
[86] Id.
[87] Id.
[88] Id.
[89] Fruits, supra note 13.
[90] U.S. Chamber of Commerce, In the Matter of Implementing the Infrastructure Investment and Jobs Act: Prevention and Elimination of Digital Discrimination, GN Docket No. 22-69 (Nov. 6, 2023), https://www.fcc.gov/ecfs/document/110620347626/2 (citations omitted).
[91] FCC, Dissenting Statement of Commissioner Brendan Carr Regarding the Implementing the Infrastructure Investment and Jobs Act: Prevention and Elimination of Digital Discrimination, GN Docket No. 22-69, Report and Order and Further Notice of Proposed Rulemaking, FCC 23-100 (2023), available at https://docs.fcc.gov/public/attachments/FCC-23-100A3.pdf.
[92] George S. Ford, Will Digital Discrimination Policies End Discount Plans for Low-Income Consumers? (Phoenix Ctr. for Advanced Legal & Econ. Pub. Pol’y Stud., Nov. 1, 2023), https://www.fcc.gov/ecfs/document/1103079827403/5.
[93] HCS EdConnect, Welcome to HCS EdConnect (2023), https://www.edconnect.org.
[94] WISPA, In the Matter of Implementing the Infrastructure Investment and Jobs Act: Prevention and Elimination of Digital Discrimination, GN Docket No. 22-69 (Nov. 8, 2023), https://www.fcc.gov/ecfs/document/1108944918538/1.
[95] Testimony of Brendan Carr, Commissioner, Federal Communications Commission, Before the Subcommittee on Communications and Technology of the United States House of Representatives Committee on Energy and Commerce, “Oversight of President Biden’s Broadband Takeover” (Nov. 30, 2023), available at https://d1dth6e84htgma.cloudfront.net/11_30_23_Carr_Testimony_3163ea4363.pdf.
[96] Title II NPRM, supra note 14.
[97] SSOIO, supra note 16.
[98] See, Paul Krugman & Robin Wells, Economics (4th ed. 2015) at 389 (“So the natural monopolist has increasing returns to scale over the entire range of output for which any firm would want to remain in the industry—the range of output at which the firm would at least break even in the long run. The source of this condition is large fixed costs: when large fixed costs are required to operate, a given quantity of output is produced at lower average total cost by one large firm than by two or more smaller firms.”)
[99] Id. (“The most visible natural monopolies in the modern economy are local utilities—water, gas, and sometimes electricity. As we’ll see, natural monopolies pose a special challenge to public policy.”)
[100] Richard H. K. Vietor, Contrived Competition (1994) at 167 (“[I]n the early part of the twentieth century, American Telephone and Telegraph (AT&T) set itself the goal of providing universal telephone services through an end-to-end national monopoly. … By [the 1960s], however, the distortions of regulatory cross-subsidy had diverged too far from the economics of technological change.”). Thomas W. Hazlett, Cable TV Franchises as Barriers to Video Competition, 2 Va. J.L. & Tech. 1 (2007) (“Traditionally, municipal cable TV franchises were advanced as consumer protection to counter “natural monopoly” video providers. … Now, marketplace changes render even this weak traditional case moot. … [V]ideo rivalry has proven viable, with inter-modal competition from satellite TV and local exchange carriers (LECs) offering “triple play” services.”)
[101] Id.
[102] Share of United States Households Using Specific Technologies, Our World in Data (n.d.), https://ourworldindata.org/grapher/technology-adoption-by-households-in-the-united-states.
[103] Edward Carlson, Cutting the Cord: NTIA Data Show Shift to Streaming Video as Consumers Drop Pay-TV, NTIA (2019), https://www.ntia.gov/blog/2019/cutting-cord-ntia-data-show-shift-streaming-video-consumers-drop-pay-tv.
[104] Karl Bode, A New Low: Just 46% Of U.S. Households Subscribe to Traditional Cable TV, TechDirt (Sep. 18, 2023), https://www.techdirt.com/2023/09/18/a-new-low-just-46-of-u-s-households-subscribe-to-traditional-cable-tv. See also, Shira Ovide, Cable TV Is the New Landline, New York Times (Jan. 6, 2022), https://www.nytimes.com/2022/01/06/technology/cable-tv.html.
[105] SSOIO, supra, note 16.
[106] FCC, Wireless Telecommunications Bureau Report: Policy Review of Mobile Broadband Operators’ Sponsored Data Offerings for Zero-Rated Content and Services (Jan. 2017), available at https://transition.fcc.gov/Daily_Releases/Daily_Business/2017/db0111/DOC-342987A1.pdf.
[107] SSOIO, supra, note 16.
[108] Hyun Ji Lee & Brian Whitacre, Estimating Willingness-to-Pay for Broadband Attributes among Low-Income Consumers: Results from Two FCC Lifeline Pilot Projects, 41 Telecomm. Pol’y. 769 (Oct. 2017).
[109] Geoffrey A. Manne, Ben Sperry, Berin Szóka, & Tom Struble, ICLE & TechFreedom Policy Comments (Jul. 14, 2014), available at https://laweconcenter.org/images/articles/icle-tf_nn_policy_comments.pdf.
[110] Mozilla Corp. v. Fed. Commc’ns Comm’n, 940 F.3d 1 (D.C. Cir. 2019) (citations omitted).
[111] Id.
[112] In 2015, when the FCC voted to enact the 2015 Open Internet Order, Chair Tom Wheeler promised to forebear from applying such rate regulation, stating flatly that “we are not trying to regulate rates.” FCC Reauthorization: Oversight of the Commission, Hearing Before the Subcommittee on Communications and Technology, Committee on Energy and Commerce, House of Representatives, 114 Cong. 27 (Mar. 19, 2015) (Statement of Tom Wheeler). Standing as a nominee to the FCC, Gigi Sohn was asked during a 2021 confirmation hearing before the U.S. Senate Commerce Committee if she would support the agency’s regulation of broadband rates. She responded: “No. That was an easy one.” David Shepardson, FCC Nominee Does Not Support U.S. Internet Rate Regulation, Reuters (Dec. 1, 2021), https://www.reuters.com/world/us/fcc-nominee-does-not-support-us-internet-rate-regulation-2021-12-01. In September 2023, in a speech announcing the FCC’s proposal to regulate broadband internet under Title II of the Communications Act, Chair Jessica Rosenworcel was emphatic: “They say this is a stalking horse for rate regulation. Nope. No how, no way.” FCC Chair Rosenworcel on Reinstating Net Neutrality Rules, C-Span (Sep. 26, 2023), https://www.c-span.org/video/?530731-1/fcc-chair-rosenworcel-reinstating-net-neutrality-rules.
[113] Vietor, supra note 89.
[114] Id. See also, Illinois Economic and Fiscal Commission, Telecommunications Deregulation Issues and Impacts: A Special Report (Apr. 2001), available at https://www.ilga.gov/commission/cgfa/archives/telecom_dereg.PDF and Kevin J. Martin, Balancing Deregulation and Consumer Protection, 17 Commlaw Conspectus (2008), available at https://transition.fcc.gov/commissioners/previous/martin/MartinSpeech011609.pdf.
[115] Fruits & Manne, supra note 5, at 1.
[116] Id.
[117] Id. at 7.
[118] Jonathan E. Nuechterlein & Howard Shelanski, Building on What Works: An Analysis of U.S. Broadband Policy, 73 Fed. Comm. L.J. 219 (2021)
[119] Fruits & Manne, supra note 5, at 13.
[120] Digital Discrimination Order, supra note 15 [emphasis added].
[121] Brief of the International Center for Law & Economics and the Information Technology & Innovation Foundation as Amici Curiae in Support of Petitioners and Setting Aside the Commission’s Order, Minnesota Telecom Alliance v. FCC, No. 24-1179 (8th Cir. Apr. 29, 2024) available at https://laweconcenter.org/wp-content/uploads/2024/04/2024-04-29-ICLE-ITIF-Amicus-Brief.pdf.
[122] IIJA 60102 (h)(4)(B).
[123] U.S. Dep’t of Com., supra note 66, at 66. States have begun to follow this lead by prescribing obligations to local providers for quality and price on deployments that have speeds and capabilities far above what BEAD and the FCC consider as the baseline for a “served” household. See, e.g., ConnectLA, BEAD Initial Proposal, vol. 2 (Aug. 2023), available at https://connect.la.gov/media/3gylvrgc/bead-vol-2-final.pdf (prescribing a complex system for preferencing providers that deploy “affordable” fiber and other high-speed service to middle-class homes).
[124] RUS Vol. 87, No. 149, Notice of Availability of the Draft Programmatic Environmental Assessment for the Partnerships for Climate-Smart Commodities Funding Opportunity, Docket No. NRCS–2022–0009 (U.S.D.A., Aug. 4, 2022), https://www.federalregister.gov/documents/2022/08/04/2022-16694/rural-econnectivity-program and RD, Preparing for ReConnect Round 4, (USDA) available at https://www.rd.usda.gov/sites/default/files/Preparing-for-ReConnect-Round-4.pdf.
[125] New York State Telecommunications Association, Inc. v. James, No. 21-1075 (2nd Cir. Apr. 26, 2024), available at https://www.courthousenews.com/wp-content/uploads/2024/04/ny-broadband-law-opinion-second-circuit.pdf. See also, Randolph J. May & Seth L. Cooper, Second Circuit Hears Preemption Challenge to New York’s Broadband Rate Regulation Law, FedSoc Blog (Feb. 7, 2023), https://fedsoc.org/commentary/fedsoc-blog/second-circuit-hears-preemption-challenge-to-new-york-s-broadband-rate-regulation-law.
[126] Fruits & Manne, supra note 5, at 16.
[127] Id. at 1.
[128] FCC, Fourth Report and Order, Declaratory Ruling, and Third Further Notice of Proposed Rulemaking Accelerating Wireline Broadband Deployment by Removing Barriers to Infrastructure Investment, WC Docket No. 17-84 (Dec. 15, 2023), available at https://docs.fcc.gov/public/attachments/FCC-23-109A1.pdf [hereinafter “Poles Order”].
[129] Id.
[130] Id. at ¶ 7.
[131] Id.
[132] Id.
[133] Kristian Stout & Eric Fruits, Reply Comments of the International Center for Law & Economics, In the Matter of Accelerating Wireline Broadband Deployment by Removing Barriers to Infrastructure Investment, WC Docket No. 17-84 at 4 (submitted Aug. 26, 2022), available at https://laweconcenter.org/wp-content/uploads/2022/08/Pole-Attachments-Reply-Comments-2022-08-27-v2.pdf.
[134] Id.
[135] See Poles Order at ¶ 42.
[136] Id.
[137] Id. at 8.
[138] Id. at 9.
[139] Id.
[140] See Poles Order at ¶ 42.
[141] Id.
[142] Id. at 10.
[143] Ben Sperry, Geoffrey A. Manne, & Kristian Stout, The Role of Antitrust and Pole-Attachment Oversight in TVA Broadband Deployment (Int’l Ctr. for L. & Econ. Issue Brief 2023-09-04, 2023), available at https://laweconcenter.org/wp-content/uploads/2023/08/TVA-Pole-Attachments-Issue-Brief.pdf.
[144] Id. at 2.
[145] Id. at 3.
[146] Id.
[147] Id. at 4.
[148] Id.
[149] Id.
[150] Id. at 6-9.
[151] Id. at 10.
[152] Id.
[153] Id. at 11.
[154] Sen. Michael S. Lee, Letter to DOJ Re: Tennessee Valley Authority (TVA) – Supporting Broadband Deployment (June 22, 2023), in Ben Sperry, Geoffrey A. Manne, & Kristian Stout, The Role of Antitrust and Pole-Attachment Oversight in TVA Broadband Deployment (Int’l. Ctr. for L. & Econ. Issue Brief, Sep. 4, 2023) available at https://laweconcenter.org/wp-content/uploads/2023/08/TVA-Pole-Attachments-Issue-Brief.pdf.
[155] Sperry, Manne, & Stout, supra note 124, at 16.
[156] See, e.g., BEAD NOFO, supra note 71.
[157] Manne, Stout, & Sperry, supra note 1.
[158] Id.
[159] Id.
[160] Christopher S. Yoo, Jesse Lambert & Timothy P. Pfenninger, Municipal Fiber in the United States: A Financial Assessment, 46 Telecomm. Pol. 102292 (Jun. 2022).
[161] George S. Ford, Electricity Rates and the Funding of Municipal Broadband Networks: An Empirical Analysis, 102 Energy Econ. 105475 (2021).
