The Law and Economics of the FCC’s Transaction Review Process
This article assesses the FCC’s current policies and rules regarding transaction reviews, concluding that the Commission’s current spectrum transfer review process harms consumer welfare. In particular, the FCC’s spectrum screen as currently structured, its standard of review for spectrum transfers, its use of conditions, as well as the scope of its transaction reviews exceed legal limits, impede efficient markets for spectrum, and deter welfare-increasing transactions and investment.
First we explain the FCC’s current policies and decisions regarding transaction reviews and assess their appropriateness with respect to the Commission’s authorizing legislation, regulations and case law. With respect to the scope of its transaction reviews and its use of conditions in particular, we find that the FCC’s practices exceed their permissible limits.
Next we address the economics of the FCC’s policies and decisions, explaining and assessing the animating economic logic behind the FCC’s actions. We demonstrate that the FCC’s current spectrum screen and transaction review standards rest on the premise that spectrum concentration in markets inherently leads to anticompetitive behavior. Further, we explain the flaws in this premise.
In demonstrating and assessing the basis of the FCC’s transaction reviews, we discuss the particulars of the FCC’s spectrum screen in detail, focusing on its use of concentration metrics and claims that its full analysis (beyond the initial screen) investigates competitive conditions more broadly. As we discuss, the Commission uses HHIs and spectrum concentration measures improperly as de facto triggers for per se illegality, rather than triggers for further investigation. Further, none of the full analyses described by the Commission investigates an aspect of competition other than market or spectrum concentration; instead, they simply restate in more detail the structural analysis implied by the HHI test and spectrum screen.
Addressing the economics underlying the FCC’s actions, we demonstrate that both economic theory and evidence indicate that the presence of more competitors in telecommunications markets does not necessarily result in lower prices and better service for consumers. Particularly in industries (like wireless) that are characterized by rapid technological change, non-horizontal competitive constraints and shifting consumer demand, the threat of entry and the need for repeated contracts with input providers with market power operate to constrain strategic behavior, even in heavily concentrated markets.
The welfare effects of spectrum concentration are at worst ambiguous, and, as we demonstrate, as the market has grown more concentrated, investment, coverage and product diversity have increased while prices for consumers have decreased. These results are consistent with a more robust model of firm behavior in the industry that takes account of entry threats and technological change.
Next we undertake a detailed critique of the FCC staff’s analysis of the AT&T/T-Mobile merger, demonstrating that it exhibits the same flaws as the agency’s more cursory transaction reviews.
We conclude with a discussion of the policy implications and suggestions for reform.