Spotlight

July 2024

HIGHLIGHTS

The View from the United Kingdom: A TOTM Q&A with John Fingleton

What is the UK doing in the field of digital-market regulation, and what do you think it is achieving? There are probably four areas to . . .

What is the UK doing in the field of digital-market regulation, and what do you think it is achieving?

There are probably four areas to consider.

The first is that the UK’s jurisdiction on mergers increased with Brexit. The UK is not subject to the same turnover threshold as under European law, and this enables it to call in a wider range of deals. It has also been able to look at different theories of harm in digital markets. It has done that in probably more than 10 cases where it examined issues like potential competition, vertical exclusion, etc.

Read the full piece here.

The Legality of the FTC’s Noncompete Ban Is Less Certain Than Masur and Posner Suggest

In a recent article for ProMarket, Jonathan Masur and Eric Posner defend the legality of the Federal Trade Commission’s rule banning noncompetes. However, little of their argument addresses the . . .

In a recent article for ProMarket, Jonathan Masur and Eric Posner defend the legality of the Federal Trade Commission’s rule banning noncompetes. However, little of their argument addresses the widespread contrary arguments against the ban.

On the Yale Journal of Regulation Notice and Comment Blog, Dan Crane recently shared the results of an informal survey of antitrust and administrative law professors. Of his 17 respondents, “Only one person predicted that the rule will be upheld.” Both the Wall Street Journal and Washington Post editorial boards have argued that the FTC lacks congressional authority to issue the rule. While it is risky to draw inference from silence, it seems notable that the New York Times editorial board, a long-time advocate for FTC Chair Lina Khan and early supporter of the noncompete rule, has not opined. A recent Congressional Research Service report characterizes the FTC’s legal authority to issue such rules as “unsettled.”

Read the full piece here.

New York, Listen to California: Antitrust Legislation Threatens Our Innovation Economy

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.”

The View from Canada: A TOTM Q&A with Aaron Wudrick

Aaron, could you please tell us a bit about your background and how you became interested in competition law and digital-competition regulation? I’m a lawyer . . .

Aaron, could you please tell us a bit about your background and how you became interested in competition law and digital-competition regulation?

I’m a lawyer by profession, but have taken a somewhat unconventional career path—I started as a litigator in a small general practice in my hometown outside Toronto, moved on to corporate law with one the world’s biggest law firms in London, Hong Kong, and Abu Dhabi, and then came back to Canada, where I moved through roles in polling and market research, lobbying, and tax advocacy. For the last three years, I’ve run the Domestic Policy Program at the Macdonald-Laurier Institute, an Ottawa-based think tank. Competition law—and especially the emergence of dominant digital players—has been one of my biggest files, primarily because it has become so politically salient in recent years.

Read the full piece here.

ICLE Comments Re: Request for Information on Consolidation in Health Care Markets

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. . . .

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. 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.

II. Discussion

A. Economic Research and Other Forms of Policy R&D Provide a Critical Foundation for Enforcement Policy

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.

1. Policy investigations

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.

2. Economic research on provider consolidation

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]

B. There Is No Sound Basis for New Substantive Competition Regulations Regarding Health-Care Acquisitions, and the RFI Seems Unlikely to Provide One

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.

C. Vertical Transactions Are Not Generally Anticompetitive

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.

D.  A Provider’s For-Profit or Not-for-Profit Status May Say Little About the Likely Competitive Effects of Mergers or Acquisitions Involving that Provider

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]

E. Various Models of Health-Care Delivery May Be Associated with Complex Tradeoffs

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.

F. The Framing of a Request for Information Can Influence the Quality of the Response

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.

III. Conclusion

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.

SHORT FORM WRITTEN OUTPUT

FCC’s Digital-Discrimination Rules: Bridging the Divide or a Bridge Too Far?

The Federal Communications Commission’s (FCC) recently enacted rules to prevent so-called “digital discrimination” in broadband access are facing a significant legal challenge in the 8th U.S. Circuit . . .

The Federal Communications Commission’s (FCC) recently enacted rules to prevent so-called “digital discrimination” in broadband access are facing a significant legal challenge in the 8th U.S. Circuit Court of Appeals. Earlier this week, the U.S. Justice Department and the FCC submitted their brief on the matter. Now that the parties have made their “opening arguments” in the case, let’s look at the key issues in dispute. They include the scope of the FCC’s authority, interpretation of congressional mandates, and the balance between promoting equal access to broadband and preserving market incentives for broadband deployment.

Read the full piece here.

The View from the United Kingdom: A TOTM Q&A with John Fingleton

What is the UK doing in the field of digital-market regulation, and what do you think it is achieving? There are probably four areas to . . .

What is the UK doing in the field of digital-market regulation, and what do you think it is achieving?

There are probably four areas to consider.

The first is that the UK’s jurisdiction on mergers increased with Brexit. The UK is not subject to the same turnover threshold as under European law, and this enables it to call in a wider range of deals. It has also been able to look at different theories of harm in digital markets. It has done that in probably more than 10 cases where it examined issues like potential competition, vertical exclusion, etc.

Read the full piece here.

What Does Murthy v Missouri Mean for Online Speech?

After a lot of anticipation from Supreme Court watchers, the Murthy v. Missouri opinion has finally been released. As the oral argument suggested, standing was . . .

After a lot of anticipation from Supreme Court watchers, the Murthy v. Missouri opinion has finally been released. As the oral argument suggested, standing was the issue for the Court, who in a 6-3 decision written by Justice Amy Coney Barrett ruled that none of the plaintiffs had standing, due to a lack of traceability and redressability of the alleged injuries. The result: challenging backdoor censorship just got a lot harder.

Read the full piece here.

An Equilibrium-Adjustment Theory of Current Trends in Administrative Law

This essay began as a response to claims that the argument that Chevron encourages congressional inaction has been refuted by the best available evidence. That Chevron causes such inaction . . .

This essay began as a response to claims that the argument that Chevron encourages congressional inaction has been refuted by the best available evidence. That Chevron causes such inaction is one of the arguments made by petitioners in Loper Bright. Leading scholars reject the argument. For instance, Chris Walker has called it one of the “least persuasive points” made at oral argument and Jim Speta has called it “empirically untrue.” Last year, Nicholas Bednar had a very good essay at Notice & Comment arguing that whether Chevron in fact has this effect is an empirical question. He went on to review literature related to (his framing of) this question and concluded by finding that the claim is unsupported and suggesting that its proponents lack candor.

Read the full piece here.

Caution on Competition Law

Margrethe Vestager, the European Union’s commissioner for competition, posits that competition law has not addressed “the structural entrenchment of companies holding market power”, and that . . .

Margrethe Vestager, the European Union’s commissioner for competition, posits that competition law has not addressed “the structural entrenchment of companies holding market power”, and that sweeping regulations like the European Union’s Digital Markets Act (DMA) are therefore justified (By invitation, June 3rd). She compares the case-by-case approach of competition enforcement to “playing a never-ending game of whack-a-mole”. However, enforcement is often slow and complex, especially in the kinds of “abuse of dominance” cases that have been brought against large online platforms. This deliberate pace is necessary, as the companies’ business models and the consequences of their behaviour are themselves complex.

Read the full piece here.

The CFPB’s Flawed Credit Card Rate Analysis

Competition benefits consumers, not just through lower prices and better quality, but also by protecting them against fraudulent practices. Clear-eyed government regulation can promote competition . . .

Competition benefits consumers, not just through lower prices and better quality, but also by protecting them against fraudulent practices. Clear-eyed government regulation can promote competition and consumer protection by stomping out fraudulent and deceptive practices as well as facilitating the flow of accurate, easy-to-understand information. But what happens when the government is the source of bad information and uses that to promote specious claims that competition has “failed”? In the case of the Consumer Financial Protection Bureau, another round of misleading economic analysis is being used to justify further intrusions on market competition that could confuse consumers and lead to worse regulation.

Read the full piece here.

India Should Question Europe’s Digital Competition Regulation Strategy

A February report from the Committee on Digital Competition Law (CDCL) recommended special competition rules for digital markets in India. It was accompanied by a draft Digital . . .

A February report from the Committee on Digital Competition Law (CDCL) recommended special competition rules for digital markets in India. It was accompanied by a draft Digital Competition Act (DCA) that is virtually identical to the European Union’s Digital Markets Act (DMA). Since it entered into force early last month, the DMA has imposed strict preemptive rules on so-called digital “gatekeepers,” a cohort of mostly American tech giants like Google, Amazon, Apple, Meta, and Microsoft.

Read the full piece here.

The Legality of the FTC’s Noncompete Ban Is Less Certain Than Masur and Posner Suggest

In a recent article for ProMarket, Jonathan Masur and Eric Posner defend the legality of the Federal Trade Commission’s rule banning noncompetes. However, little of their argument addresses the . . .

In a recent article for ProMarket, Jonathan Masur and Eric Posner defend the legality of the Federal Trade Commission’s rule banning noncompetes. However, little of their argument addresses the widespread contrary arguments against the ban.

On the Yale Journal of Regulation Notice and Comment Blog, Dan Crane recently shared the results of an informal survey of antitrust and administrative law professors. Of his 17 respondents, “Only one person predicted that the rule will be upheld.” Both the Wall Street Journal and Washington Post editorial boards have argued that the FTC lacks congressional authority to issue the rule. While it is risky to draw inference from silence, it seems notable that the New York Times editorial board, a long-time advocate for FTC Chair Lina Khan and early supporter of the noncompete rule, has not opined. A recent Congressional Research Service report characterizes the FTC’s legal authority to issue such rules as “unsettled.”

Read the full piece here.

The View from Canada: A TOTM Q&A with Aaron Wudrick

Aaron, could you please tell us a bit about your background and how you became interested in competition law and digital-competition regulation? I’m a lawyer . . .

Aaron, could you please tell us a bit about your background and how you became interested in competition law and digital-competition regulation?

I’m a lawyer by profession, but have taken a somewhat unconventional career path—I started as a litigator in a small general practice in my hometown outside Toronto, moved on to corporate law with one the world’s biggest law firms in London, Hong Kong, and Abu Dhabi, and then came back to Canada, where I moved through roles in polling and market research, lobbying, and tax advocacy. For the last three years, I’ve run the Domestic Policy Program at the Macdonald-Laurier Institute, an Ottawa-based think tank. Competition law—and especially the emergence of dominant digital players—has been one of my biggest files, primarily because it has become so politically salient in recent years.

Read the full piece here.

Title II: The Model T of Broadband Regulation

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.

I. Introduction

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.

II. Is Net Neutrality Still a Thing?

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:

  1. Blocking of legal content, such as when a phone company providing service was accused of blocking Voice over Internet Protocol (“VoIP”) telephone service that competed with the phone company’s landline business.[5]
  2. Throttling, or the intentional slowing of an internet service, such as when an ISP was alleged to have slowed or interfered with file sharing using BitTorrent protocols;[6] and
  3. Paid prioritization, in which a content provider pays an ISP a fee for faster service — commonly referred to as “fast lanes.”[7]

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.

III. Title II Is Much More than Net Neutrality

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:

  1. Zero-rating; and
  2. So-called “data caps” and usage-based pricing.

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.

IV. Commoditizing Broadband and the Elusive Search for Perfect Competition

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.

V. Conclusion

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.

New York, Listen to California: Antitrust Legislation Threatens Our Innovation Economy

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.”

COMMENTS & STATEMENTS

ICLE and Macdonald-Laurier Institute Comments to Competition Bureau Canada Consultation on AI and Competition

Executive Summary We thank the Competition Bureau Canada for promoting this dialogue on competition and artificial intelligence (AI) by publishing its Artificial Intelligence and Competition . . .

Executive Summary

We thank the Competition Bureau Canada for promoting this dialogue on competition and artificial intelligence (AI) by publishing its Artificial Intelligence and Competition Discussion Paper (“Discussion Paper”)[1]. The International Center for Law & Economics (“ICLE”) is a nonprofit, nonpartisan global research and policy center founded with the goal of building the intellectual foundations for sensible, economically grounded policy. ICLE promotes the use of law & economics methodologies to inform public-policy debates, and has longstanding expertise in the evaluation of competition law and policy in several jurisdictions. ICLE’s interest is to ensure that competition law remains grounded in clear rules, established precedent, a record of evidence, and sound economic analysis. The Macdonald-Laurier Institute (MLI) is an independent and nonpartisan think tank based in Ottawa with the ambition to drive the national conversation and make Canada the best-governed country in the world.

In our comments, we express concern that policymakers may equate the rapid rise of AI services and products with a need to intervene in these markets—when, in fact, the opposite is true. As we explain, the rapid growth of AI markets (or, more precisely, products and services based on AI technology), as well as the fact that new market players are thriving, suggests that competition is intense. If incumbent firms could easily leverage their dominance into burgeoning generative AI markets, we would not have seen the growth of generative AI unicorns such as OpenAI, Midjourney, and Anthropic, to name but a few.

Of course, this is not to say that AI markets are not important—quite the opposite. AI is already changing the ways that many firms do business and improving employee productivity in many industries.[2] The technology is also increasingly useful in the field of scientific research, where it has enabled creation of complex models that expand scientists’ reach.[3] Against this backdrop, EU Commissioner Margrethe Vestager was right to point out that it “is fundamental that these new markets stay competitive, and that nothing stands in the way of businesses growing and providing the best and most innovative products to consumers.”[4]

But while sensible enforcement is of vital importance to maintain competition and consumer welfare, kneejerk reactions may yield the opposite outcome. As our comments explain, overenforcement in the field of AI could cause the very harms that policymakers seek to avert. For instance, preventing so-called “Big Tech” firms from competing in these markets (for example, by threatening competition intervention as soon as they embed AI services in their ecosystems or seek to build strategic relationships with AI startups) may thwart an important source of competition needed to keep today’s leading AI firms in check. In short, competition in AI markets is important, but trying naïvely to hold incumbent tech firms back, out of misguided fears they will come to dominate this space, is likely to do more harm than good.

Our comments proceed as follows. Section I summarizes recent calls for competition intervention in AI markets. Section II argues that many of these calls are underpinned by fears of data-related incumbency advantages (often referred to as “data-network effects”). Section III explains why these effects are unlikely to play a meaningful role in AI markets. Section IV explains why current merger policy is sufficient to address any potential anticompetitive acquisition or partnership in the AI sector without need for any special rules, like presumptions or inverse burdens of proof. Section V explains how balancing user protection with innovation in AI markets is particularly important in the Canadian context. Finally, Section VI concludes by offering five key takeaways to help policymakers and agencies (including the Competition Bureau Canada) better weigh the tradeoffs inherent to competition intervention in generative-AI markets.

I. Calls for Intervention in AI Markets

It was once (and frequently) said that Google’s “data monopoly” was unassailable: “If ‘big data’ is the oil of the information economy, Google has Standard Oil-like monopoly dominance—and uses that control to maintain its dominant position.”[5] Similar claims of data dominance have been attached to nearly all large online platforms, including Facebook (Meta), Amazon, and Uber.[6]

While some of these claims continue even today (for example, “big data” is a key component of the U.S. Justice Department’s (DOJ) Google Search and ad-tech antitrust suits),[7] a shiny new data target has emerged in the form of generative artificial intelligence (AI). The launch of ChatGPT in November 2022, as well as the advent of AI image-generation services like Midjourney and Dall-E, have dramatically expanded the public’s conception of what is—and what might be—possible to achieve with generative-AI technologies built on massive datasets.

While these services remain in the early stages of mainstream adoption and remain in the throes of rapid, unpredictable technological evolution, they nevertheless already appear to be on the radar of competition policymakers around the world. Several antitrust enforcers appear to believe that, by acting now, they can avoid the “mistakes” that were purportedly made during the formative years of Web 2.0.[8] These mistakes, critics assert, include failing to appreciate the centrality of data in online markets, as well as letting mergers go unchecked and allowing early movers to entrench their market positions.[9] As Lina Khan, chair of the U.S. Federal Trade Commission (FTC), put it: “we are still reeling from the concentration that resulted from Web 2.0, and we don’t want to repeat the mis-steps of the past with AI.”[10]

This response from the competition-policy world is deeply troubling. Rather than engage in critical self-assessment and adopt an appropriately restrained stance, the enforcement community appears to be champing at the bit. Rather than reassess their prior assumptions based on the current technological moment, enforcers’ top priority appears to be figuring out how to rapidly and almost reflexively deploy existing competition tools to address the presumed competitive failures presented by generative AI.[11]

It is increasingly common for competition enforcers to argue that so-called “data-network effects” serve not only to entrench incumbents in those markets where the data is collected, but also to confer similar, self-reinforcing benefits in adjacent markets. Several enforcers have, for example, prevented large online platforms from acquiring smaller firms in adjacent markets, citing the risk that they could use their vast access to data to extend their dominance into these new markets.[12]

They have also launched consultations to ascertain the role that data plays in AI competition. For instance, in an ongoing consultation, the European Commission asks: “What is the role of data and what are its relevant characteristics for the provision of generative AI systems and/or components, including AI models?”[13] Unsurprisingly, the FTC has likewise been bullish about the risks posed by incumbents’ access to data. In comments submitted to the U.S. Copyright Office, for example, the FTC argued that:

The rapid development and deployment of AI also poses potential risks to competition. The rising importance of AI to the economy may further lock in the market dominance of large incumbent technology firms. These powerful, vertically integrated incumbents control many of the inputs necessary for the effective development and deployment of AI tools, including cloud-based or local computing power and access to large stores of training data. These dominant technology companies may have the incentive to use their control over these inputs to unlawfully entrench their market positions in AI and related markets, including digital content markets.[14]

Certainly, it stands to reason that the largest online platforms—including Alphabet, Meta, Apple, and Amazon—should have a meaningful advantage in the burgeoning markets for AI services. After all, it is widely recognized that data is an essential input for generative AI.[15] This competitive advantage should be all the more significant, given that these firms have been at the forefront of AI technology for more than a decade. Over this period, Google’s DeepMind and AlphaGo and Meta’s Llama have routinely made headlines.[16] Apple and Amazon also have vast experience with AI assistants, and all of these firms use AI technology throughout their platforms.[17]

Contrary to what one might expect, however, the tech giants have, to date, been largely unable to leverage their vast data troves to outcompete startups like OpenAI and Midjourney. At the time of writing, OpenAI’s ChatGPT appears to be, by far, the most successful chatbot,[18] despite the large tech platforms’ apparent access to far more (and more up-to-date) data.

In these comments, we suggest that there are important lessons to glean from these developments, if only enforcers would stop to reflect. The meteoric rise of consumer-facing AI services should offer competition enforcers and policymakers an opportunity for introspection. As we explain, the rapid emergence of generative-AI technology may undercut many core assumptions of today’s competition-policy debates, which have largely focused on the rueful after-effects of the purported failure of 20th-century antitrust to address the allegedly manifest harms of 21st-century technology. These include the notions that data advantages constitute barriers to entry and can be leveraged to project dominance into adjacent markets; that scale itself is a market failure to be addressed by enforcers; and that the use of consumer data is inherently harmful to those consumers.

II. Data-Network Effects Theory and Enforcement

Proponents of tougher interventions by competition enforcers into digital markets often cite data-network effects as a source of competitive advantage and barrier to entry (though terms like “economies of scale and scope” may offer more precision).[19] The crux of the argument is that “the collection and use of data creates a feedback loop of more data, which ultimately insulates incumbent platforms from entrants who, but for their data disadvantage, might offer a better product.”[20] This self-reinforcing cycle purportedly leads to market domination by a single firm. Thus, it is argued, for example, that Google’s “ever-expanding control of user personal data, and that data’s critical value to online advertisers, creates an insurmountable barrier to entry for new competition.”[21]

Right off the bat, it is important to note the conceptual problem these claims face. Because data can be used to improve the quality of products and/or to subsidize their use, the idea of data as an entry barrier suggests that any product improvement or price reduction made by an incumbent could be a problematic entry barrier to any new entrant. This is tantamount to an argument that competition itself is a cognizable barrier to entry. Of course, it would be a curious approach to antitrust if competition were treated as a problem, as it would imply that firms should under-compete—i.e., should forego consumer-welfare enhancements—in order to inculcate a greater number of firms in a given market simply for its own sake.[22]

Meanwhile, actual economic studies of data-network effects have been few and far between, with scant empirical evidence to support the theory.[23] Andrei Hagiu and Julian Wright’s theoretical paper offers perhaps the most comprehensive treatment of the topic to date.[24] The authors ultimately conclude that data-network effects can be of different magnitudes and have varying effects on firms’ incumbency advantage.[25] They cite Grammarly (an AI writing-assistance tool) as a potential example: “As users make corrections to the suggestions offered by Grammarly, its language experts and artificial intelligence can use this feedback to continue to improve its future recommendations for all users.”[26]

This is echoed by other economists who contend that “[t]he algorithmic analysis of user data and information might increase incumbency advantages, creating lock-in effects among users and making them more reluctant to join an entrant platform.”[27] Crucially, some scholars take this logic a step further, arguing that platforms may use data from their “origin markets” in order to enter and dominate adjacent ones:

First, as we already mentioned, data collected in the origin market can be used, once the enveloper has entered the target market, to provide products more efficiently in the target market. Second, data collected in the origin market can be used to reduce the asymmetric information to which an entrant is typically subject when deciding to invest (for example, in R&D) to enter a new market. For instance, a search engine could be able to predict new trends from consumer searches and therefore face less uncertainty in product design.[28]

This possibility is also implicit in Hagiu and Wright’s paper.[29] Indeed, the authors’ theoretical model rests on an important distinction between within-user data advantages (that is, having access to more data about a given user) and across-user data advantages (information gleaned from having access to a wider user base). In both cases, there is an implicit assumption that platforms may use data from one service to gain an advantage in another market (because what matters is information about aggregate or individual user preferences, regardless of its origin).

Our review of the economic evidence suggests that several scholars have, with varying degrees of certainty, raised the possibility that incumbents may leverage data advantages to stifle competitors in their primary market or in adjacent ones (be it via merger or organic growth). As we explain below, however, there is ultimately little evidence to support such claims. Policymakers have, however, been keenly receptive to these limited theoretical findings, basing multiple decisions on these theories, often with little consideration given to the caveats that accompany them.[30]

Indeed, it is remarkable that, in its section on “[t]he data advantage for incumbents,” the “Furman Report” created for the UK government cited only two empirical economic studies, and they offer directly contradictory conclusions with respect to the question of the strength of data advantages.[31] Nevertheless, the Furman Report concludes that data “may confer a form of unmatchable advantage on the incumbent business, making successful rivalry less likely,”[32] and adopts without reservation “convincing” evidence from non-economists that have no apparent empirical basis.[33]

In the Google/Fitbit merger proceedings, the European Commission found that the combination of data from Google services with that of Fitbit devices would reduce competition in advertising markets:

Giving [sic] the large amount of data already used for advertising purposes that Google holds, the increase in Google’s data collection capabilities, which goes beyond the mere number of active users for which Fitbit has been collecting data so far, the Transaction is likely to have a negative impact on the development of an unfettered competition in the markets for online advertising.[34]

As a result, the Commission cleared the merger on the condition that Google refrain from using data from Fitbit devices for its advertising platform.[35] The Commission will likely focus on similar issues during its ongoing investigation of Microsoft’s investment into OpenAI.[36]

Along similar lines, the FTC’s complaint to enjoin Meta’s purchase of the virtual-reality (VR) fitness app Within relied, among other things, on the fact that Meta could leverage its data about VR-user behavior to inform its decisions and potentially outcompete rival VR-fitness apps: “Meta’s control over the Quest platform also gives it unique access to VR user data, which it uses to inform strategic decisions.”[37]

The DOJ’s twin cases against Google also implicate data leveraging and data barriers to entry. The agency’s ad-tech complaint charges that “Google intentionally exploited its massive trove of user data to further entrench its monopoly across the digital advertising industry.”[38] Similarly, in its search complaint, the agency argues that:

Google’s anticompetitive practices are especially pernicious because they deny rivals scale to compete effectively. General search services, search advertising, and general search text advertising require complex algorithms that are constantly learning which organic results and ads best respond to user queries; the volume, variety, and velocity of data accelerates the automated learning of search and search advertising algorithms.[39]

Finally, updated merger guidelines published in recent years by several competition enforcers cite the acquisition of data as a potential source of competition concerns. For instance, the FTC and DOJ’s newly published guidelines state that “acquiring data that helps facilitate matching, sorting, or prediction services may enable the platform to weaken rival platforms by denying them that data.”[40] Likewise, the UK Competition and Markets Authority (CMA) warns against incumbents acquiring firms in order to obtain their data and foreclose other rivals:

Incentive to foreclose rivals…

7.19(e) Particularly in complex and dynamic markets, firms may not focus on short term margins but may pursue other objectives to maximise their long-run profitability, which the CMA may consider. This may include… obtaining access to customer data….[41]

In short, competition authorities around the globe have been taking an increasingly aggressive stance on data-network effects. Among the ways this has manifested is in basing enforcement decisions on fears that data collected by one platform might confer a decisive competitive advantage in adjacent markets. Unfortunately, these concerns rest on little to no empirical evidence, either in the economic literature or the underlying case records.

III. Data-Incumbency Advantages in Generative-AI Markets

Given the assertions canvassed in the previous section, it would be reasonable to assume that firms like Google, Meta, and Amazon should be in pole position to dominate the burgeoning market for generative AI. After all, these firms have not only been at the forefront of the field for the better part of a decade, but they also have access to vast troves of data, the likes of which their rivals could only dream when they launched their own services. Thus, the authors of the Furman Report caution that “to the degree that the next technological revolution centres around artificial intelligence and machine learning, then the companies most able to take advantage of it may well be the existing large companies because of the importance of data for the successful use of these tools.”[42]

To date, however, this is not how things have unfolded—although it bears noting that these markets remain in flux and the competitive landscape is susceptible to change. The first significantly successful generative-AI service was arguably not from either Meta—which had been working on chatbots for years and had access to, arguably, the world’s largest database of actual chats—or Google. Instead, the breakthrough came from a previously unknown firm called OpenAI.

OpenAI’s ChatGPT service currently holds an estimated 60% of the market (though reliable numbers are somewhat elusive).[43] It broke the record for the fastest online service to reach 100 million users (in only a couple of months), more than four times faster than the previous record holder, TikTok.[44] Based on Google Trends data, ChatGPT is nine times more popular worldwide than Google’s own Bard service, and 14 times more popular in the United States.[45] In April 2023, ChatGPT reportedly registered 206.7 million unique visitors, compared to 19.5 million for Google’s Bard.[46] In short, at the time we are writing, ChatGPT appears to be the most popular chatbot. The entry of large players such as Google Bard or Meta AI appear to have had little effect thus far on its market position.[47]

The picture is similar in the field of AI-image generation. As of August 2023, Midjourney, Dall-E, and Stable Diffusion appear to be the three market leaders in terms of user visits.[48] This is despite competition from the likes of Google and Meta, who arguably have access to unparalleled image and video databases by virtue of their primary platform activities.[49]

This raises several crucial questions: how have these AI upstarts managed to be so successful, and is their success just a flash in the pan before Web 2.0 giants catch up and overthrow them? While we cannot answer either of these questions dispositively, we offer what we believe to be some relevant observations concerning the role and value of data in digital markets.

A first important observation is that empirical studies suggest that data exhibits diminishing marginal returns. In other words, past a certain point, acquiring more data does not confer a meaningful edge to the acquiring firm. As Catherine Tucker put it following a review of the literature: “Empirically there is little evidence of economies of scale and scope in digital data in the instances where one would expect to find them.”[50]

Likewise, following a survey of the empirical literature on this topic, Geoffrey Manne and Dirk Auer conclude that:

Available evidence suggests that claims of “extreme” returns to scale in the tech sector are greatly overblown. Not only are the largest expenditures of digital platforms unlikely to become proportionally less important as output increases, but empirical research strongly suggests that even data does not give rise to increasing returns to scale, despite routinely being cited as the source of this effect.[51]

In other words, being the firm with the most data appears to be far less important than having enough data. This lower bar may be accessible to far more firms than one might initially think possible. And obtaining enough data could become even easier—that is, the volume of required data could become even smaller—with technological progress. For instance, synthetic data may provide an adequate substitute to real-world data,[52] or may even outperform real-world data.[53] As Thibault Schrepel and Alex Pentland surmise:

[A]dvances in computer science and analytics are making the amount of data less relevant every day. In recent months, important technological advances have allowed companies with small data sets to compete with larger ones.[54]

Indeed, past a certain threshold, acquiring more data might not meaningfully improve a service, where other improvements (such as better training methods or data curation) could have a large impact. In fact, there is some evidence that excessive data impedes a service’s ability to generate results appropriate for a given query: “[S]uperior model performance can often be achieved with smaller, high-quality datasets than massive, uncurated ones. Data curation ensures that training datasets are devoid of noise, irrelevant instances, and duplications, thus maximizing the efficiency of every training iteration.”[55]

Consider, for instance, a user who wants to generate an image of a basketball. Using a model trained on an indiscriminate range and number of public photos in which a basketball appears, but surrounded by copious other image data, the user may end up with an inordinately noisy result. By contrast, a model trained with a better method on fewer, more carefully selected images, could readily yield far superior results.[56] In one important example:

The model’s performance is particularly remarkable, given its small size. “This is not a large language model trained on the whole Internet; this is a relatively small transformer trained for these tasks,” says Armando Solar-Lezama, a computer scientist at the Massachusetts Institute of Technology, who was not involved in the new study…. The finding implies that instead of just shoving ever more training data into machine-learning models, a complementary strategy might be to offer AI algorithms the equivalent of a focused linguistics or algebra class.[57]

Platforms’ current efforts are thus focused on improving the mathematical and logical reasoning of large language models (LLMs), rather than maximizing training datasets.[58] Two points stand out. The first is that firms like OpenAI rely largely on publicly available datasets—such as GSM8K—to train their LLMs.[59] Second, the real challenge to create cutting-edge AI is not so much in collecting data, but rather in creating innovative AI-training processes and architectures:

[B]uilding a truly general reasoning engine will require a more fundamental architectural innovation. What’s needed is a way for language models to learn new abstractions that go beyond their training data and have these evolving abstractions influence the model’s choices as it explores the space of possible solutions.

We know this is possible because the human brain does it. But it might be a while before OpenAI, DeepMind, or anyone else figures out how to do it in silicon.[60]

Furthermore, it is worth noting that the data most relevant to startups in a given market may not be those data held by large incumbent platforms in other markets, but rather data specific to the market in which the startup is active or, even better, to the given problem it is attempting to solve:

As Andres Lerner has argued, if you wanted to start a travel business, the data from Kayak or Priceline would be far more relevant. Or if you wanted to start a ride-sharing business, data from cab companies would be more useful than the broad, market-cross-cutting profiles Google and Facebook have. Consider companies like Uber, Lyft and Sidecar that had no customer data when they began to challenge established cab companies that did possess such data. If data were really so significant, they could never have competed successfully. But Uber, Lyft and Sidecar have been able to effectively compete because they built products that users wanted to use—they came up with an idea for a better mousetrap. The data they have accrued came after they innovated, entered the market and mounted their successful challenges—not before.[61]

The bottom line is that data is not the be-all and end-all that many in competition circles make it out to be. While data may often confer marginal benefits, there is little sense that these are ultimately decisive.[62] As a result, incumbent platforms’ access to vast numbers of users and data in their primary markets might only marginally affect their AI competitiveness.

A related observation is that firms’ capabilities and other features of their products arguably play a more important role than the data they own.[63] Examples of this abound in digital markets. Google overthrew Yahoo, despite initially having access to far fewer users and far less data; Google and Apple overcame Microsoft in the smartphone operating-system market, despite having comparatively tiny ecosystems (at the time) to leverage; and TikTok rose to prominence despite intense competition from incumbents like Instagram, which had much larger user bases. In each of these cases, important product-design decisions (such as the PageRank algorithm, recognizing the specific needs of mobile users,[64] and TikTok’s clever algorithm) appear to have played a far more significant role than initial user and data endowments (or lack thereof).

All of this suggests that the early success of OpenAI likely has more to do with its engineering decisions than what data it did (or did not) own. Going forward, OpenAI and its rivals’ ability to offer and monetize compelling custom versions of their generative-AI technology will arguably play a much larger role than (and contribute to) their ownership of data.[65] In other words, the ultimate challenge is arguably to create a valuable platform, of which data ownership is a consequence, but not a cause.

It is also important to note that, in those instances where it is valuable, data does not just fall from the sky. Instead, it is through smart business and engineering decisions that firms can generate valuable information (which does not necessarily correlate with owning more data).

For instance, OpenAI’s success with ChatGPT is often attributed to its more efficient algorithms and training models, which arguably have enabled the service to improve more rapidly than its rivals.[66] Likewise, the ability of firms like Meta and Google to generate valuable data for advertising arguably depends more on design decisions that elicit the right data from users, rather than the raw number of users in their networks.

Put differently, setting up a business so as to extract and organize the right information is more important than simply owning vast troves of data.[67] Even in those instances where high-quality data is an essential parameter of competition, it does not follow that having vaster databases or more users on a platform necessarily leads to better information for the platform.

Indeed, if data ownership consistently conferred a significant competitive advantage, these new firms would not be where they are today. This does not mean that data is worthless, of course. Rather, it means that competition authorities should not assume that merely possessing data is a dispositive competitive advantage, absent compelling empirical evidence to support such a finding. In this light, the current wave of decisions and competition-policy pronouncements that rely on data-related theories of harm are premature.

IV. Merger Policy and AI

According to the Discussion Paper, some mergers that involve firms offering AI services or products deserve special scrutiny:

Mergers, of any form, involving a firm who supplies compute inputs, such as AI chips and cloud services, could warrant additional scrutiny due to the existing high levels of concentration in these markets. Mergers in AI markets may require additional scrutiny as large established firms may seek to acquire emerging competitors as a means of preventing or lessening competition.[68]

The Discussion Paper does not explain what form this “additional scrutiny” may take. It may entail anything from prioritization of resources to procedural rules (presumptions, burden of proof). In any case, while we understand why the two mentioned instances of mergers may raise competition concerns, it is important to acknowledge that these are theoretical concerns. To date, there is no evidence to support differentiated scrutiny for mergers involving AI firms or, in general, firms working with information technology. The view that so-called “killer acquisitions,” for instance, pose a significant competition risk is not supported by solid evidence.[69] To the contrary, the evidence suggests that acquisitions increase competition by allowing larger firms to acquire abilities relevant to innovation and by generating incentives for startups.[70]

Companies with “deep pockets” that invest in AI startups may provide those firms the resources to compete with current market leaders. Firms like Amazon, Google, Meta, and Microsoft, for instance, are investing in creating their own chips for building AI systems, aiming to be less dependent on Nvidia.[71] The availability of this source of funding may thus increase competition at all levels of the AI industry.[72]

There has been also some concern in other jurisdictions regarding recent partnerships among and investments by Big Tech firms into AI “unicorns,”[73] in particular, Amazon’s partnership with Anthropic; Microsoft’s partnership with Mistral AI; and Microsoft’s hiring of former Inflection AI employees (including, notably, founder Mustafa Suleyman) and related arrangements with the company.

Publicly available information, however, suggests that these transactions may not warrant merger-control investigation, let alone the heightened scrutiny that comes with potential Phase II proceedings. At the very least, given the AI industry’s competitive landscape, there is little to suggest these transactions merit closer scrutiny than similar deals in other sectors.

Overenforcement in the field of generative AI could paradoxically engender the very harms that policymakers currently seek to avert. Preventing Big Tech firms from competing in these markets (for example, by threatening competition intervention as soon as they build strategic relationships with AI startups) may thwart an important source of competition needed to keep today’s leading generative-AI firms in check. In short, competition in AI markets is important,[74] but trying naïvely to hold incumbent (in adjacent markets) tech firms back, out of misguided fears they will come to dominate this space, is likely to do more harm than good.

At a more granular level, there are important reasons to believe these kinds of agreements will have no negative impact on competition and may, in fact, benefit consumers—e.g., by enabling those startups to raise capital and deploy their services at an even larger scale. In other words, they do not bear any of the prima facie traits of “killer acquisitions” or even of the acquisition of “nascent potential competitors.”[75]

Most importantly, these partnerships all involve the acquisition of minority stakes and do not entail any change of control over the target companies. Amazon, for instance, will not have “ownership control” of Anthropic. The precise amount of shares acquired has not been made public, but a reported investment of $4 billion in a company valued at $18.4 billion does not give Amazon a majority stake or sufficient voting rights to control the company or its competitive strategy. [76] It has also been reported that the deal will not give Amazon any seats on the Anthropic board or special voting rights (such as the power to veto some decisions).[77] There is thus little reason to believe Amazon has acquired indirect or de facto control over Anthropic.

Microsoft’s investment in Mistral AI is even smaller, in both absolute and relative terms. Microsoft is reportedly investing just $16 million in a company valued at $2.1 billion.[78] This represents less than 1% of Mistral’s equity, making it all but impossible for Microsoft to exert any significant control or influence over Mistral AI’s competitive strategy. Likewise, there have been no reports of Microsoft acquiring seats on Mistral AI’s board or special voting rights. We can therefore be confident that the deal will not affect competition in AI markets.

Much the same applies to Microsoft’s dealings with Inflection AI. Microsoft hired two of the company’s three founders (which currently does not fall under the scope of merger laws), and also paid $620 million for nonexclusive rights to sell access to the Inflection AI model through its Azure Cloud.[79] Admittedly, the latter could entail (depending on deal’s specifics) some limited control over Inflection AI’s competitive strategy, but there is currently no evidence to suggest this will be the case.

Finally, none of these deals entail any competitively significant behavioral commitments from the target companies. There are no reports of exclusivity agreements or other commitments that would restrict third parties’ access to these firms’ underlying AI models. Again, this means the deals are extremely unlikely to negatively impact the competitive landscape in these markets.

V. Balancing Innovation and Regulation in Canada’s AI Landscape

AI presents significant opportunities and challenges for competition policy in Canada. As the technology continues to evolve, it is crucial to establish a regulatory framework that promotes innovation, while safeguarding competition and consumer protection.

The European AI Act, for example, categorizes AI systems into different risk levels—unacceptable risk, high risk, limited risk, and minimal risk. This framework allows for regulation proportional to the potential impact of the AI system. By adopting a similar risk-based approach, Canada could ensure that high-risk AI systems are subject to stringent requirements, while lower-risk systems benefit from lighter-touch regulations that encourage innovation.

To foster a competitive AI market in Canada, it is essential to avoid overly restrictive regulations that could stifle technological progress. If implemented reasonably, the EU AI Act’s flexible framework may support the development and deployment of innovative AI technologies by imposing rigorous requirements only on high-risk systems. In turn, this could support innovation by balancing the need for public safety and the protection of fundamental rights with the imperative to maintain a dynamic and competitive market environment. Overenforcement, in contrast, could lead to the opposite outcome.

Canada is currently a world leader in AI talent concentration[80] and Canada’s existing AI strategy has, to date, created significant social and economic benefits for the nation. Overly restrictive regulation (such as the proposed Artificial Intelligence and Data Act (AIDA)[81]) could lead to challenges in attracting and retaining talent, which would inevitably hamper competition.[82] Meta’s response to the proposed AIDA serves as a practical example to illustrate the potential impact of overregulation. Meta has indicated that the proposed laws could prevent the company from launching certain products in Canada due to onerous compliance costs.[83] Other tech companies share similar concerns, warning that misaligned regulations could place Canada at a competitive disadvantage globally and undermine robust competition at home.

The need to retain and attract top AI talent is another critical issue. Canada faces challenges in keeping AI talent due to more attractive opportunities abroad. To maintain its competitive edge, Canada must ensure that its regulatory frameworks do not discourage local talent from contributing to the domestic AI landscape.[84]

The Canadian government has recently committed in its federal budget to invest $2.4 billion for AI, focused primarily on computing power. Unfortunately, Meta’s subsequent release of Llama 3, a powerful open-source LLM, and Microsoft’s €4 billion investment in France’s AI capabilities highlight the need for a reassessment. Rather than computing power, Canada should instead focus on AI applications, education, and industry adoption.[85]

VI. Five Key Takeaways: Reconceptualizing the Role of Data in Generative-AI Competition

As we explain above, data (network effects) are not the source of barriers to entry that they are sometimes made out to be. The picture is far more nuanced. Indeed, as economist Andres Lerner demonstrated almost a decade ago (and the assessment is only truer today):

Although the collection of user data is generally valuable for online providers, the conclusion that such benefits of user data lead to significant returns to scale and to the entrenchment of dominant online platforms is based on unsupported assumptions. Although, in theory, control of an “essential” input can lead to the exclusion of rivals, a careful analysis of real-world evidence indicates that such concerns are unwarranted for many online businesses that have been the focus of the “big data” debate.[86]

While data can be an important part of the competitive landscape, incumbents’ data advantages are far less pronounced than today’s policymakers commonly assume. In that respect, five main lessons emerge:

  1. Data can be (very) valuable, but beyond a certain threshold, those benefits tend to diminish. In other words, having the most data is less important than having enough;
  2. The ability to generate valuable information does not depend on the number of users or the amount of data a platform has previously acquired;
  3. The most important datasets are not always proprietary;
  4. Technological advances and platforms’ engineering decisions affect their ability to generate valuable information, and this effect swamps effects stemming from the amount of data they own; and
  5. How platforms use data is arguably more important than what data or how much data they own.

These lessons have important ramifications for competition-policy debates over the competitive implications of data in technologically evolving areas.

First, it is not surprising that startups, rather than incumbents, have taken an early lead in generative AI (and in Web 2.0 before it). After all, if data-incumbency advantages are small or even nonexistent, then smaller and more nimble players may have an edge over established tech platforms. This is all the more likely given that, despite significant efforts, the biggest tech platforms were unable to offer compelling generative-AI chatbots and image-generation services before the emergence of ChatGPT, Dall-E, Midjourney, etc.

This failure suggests that, in a process akin to Clayton Christensen’s “innovator’s dilemma,”[87] something about the incumbent platforms’ existing services and capabilities was holding them back in those markets. Of course, this does not necessarily mean that those same services or capabilities could not become an advantage when the generative-AI market starts addressing issues of monetization and scale.[88] But it does mean that assumptions about a firm’s market power based on its possession of data are off the mark.

Another important implication is that, paradoxically, policymakers’ efforts to prevent Web 2.0 platforms from competing freely in generative AI markets may ultimately backfire and lead to less, not more, competition. Indeed, OpenAI is currently acquiring a sizeable lead in generative AI. While competition authorities might like to think that other startups will emerge and thrive in this space, it is important not to confuse desires with reality. While there currently exists a vibrant AI-startup ecosystem, there is at least a case to be made that the most significant competition for today’s AI leaders will come from incumbent Web 2.0 platforms—although nothing is certain at this stage. Policymakers should beware not to stifle that competition on the misguided assumption that competitive pressure from large incumbents is somehow less valuable to consumers than that which originates from smaller firms.

Finally, even if there were a competition-related market failure to be addressed in the field of generative AI (which is anything but clear), it is unclear that the remedies being contemplated would do more good than harm. Some of the solutions that have been put forward have highly ambiguous effects on consumer welfare. Scholars have shown that, e.g., mandated data sharing—a solution championed by EU policymakers, among others—may sometimes dampen competition in generative-AI markets.[89] This is also true of legislation like the General Data Protection Regulation (GDPR), which makes it harder for firms to acquire more data about consumers—assuming such data is, indeed, useful to generative-AI services.[90]

In sum, it is a flawed understanding of the economics and practical consequences of large agglomerations of data that leads competition authorities to believe that data-incumbency advantages are likely to harm competition in generative AI markets—or even in the data-intensive Web 2.0 markets that preceded them. Indeed, competition or regulatory intervention to “correct” data barriers and data network and scale effects is liable to do more harm than good.

[1] Competition Bureau Canada, Artificial Intelligence and Competition, Discussion Paper (Mar. 2024), https://competition-bureau.canada.ca/how-we-foster-competition/education-and-outreach/artificial-intelligence-and-competition#sec00.

[2] See, e.g., Michael Chui, et al., The Economic Potential of Generative AI: The Next Productivity Frontier, McKinsey (Jun. 14, 2023), https://www.mckinsey.com/capabilities/mckinsey-digital/our-insights/the-economic-potential-of-generative-AI-the-next-productivity-frontier.

[3] See, e.g., Zhuoran Qiao, Weili Nie, Arash Vahdat, Thomas F. Miller III, & Animashree Anandkumar, State-Specific Protein–Ligand Complex Structure Prediction with a Multiscale Deep Generative Model, 6 Nature Machine Intelligence, 195-208 (2024); see also Jaemin Seo, Sang Kyeun Kim, Azarakhsh Jalalvand, Rory Conlin, Andrew Rothstein, Joseph Abbate, Keith Erickson, Josiah Wai, Ricardo Shousha, & Egemen Kolemen, Avoiding Fusion Plasma Tearing Instability with Deep Reinforcement Learning, 626 Nature, 746-751 (2024).

[4] See, e.g., Press Release, Commission Launches Calls for Contributions on Competition in Virtual Worlds and Generative AI, European Commission (Jan. 9, 2024), https://ec.europa.eu/commission/presscorner/detail/en/IP_24_85.

[5] Nathan Newman, Taking on Google’s Monopoly Means Regulating Its Control of User Data, Huffington Post (Sep. 24, 2013), http://www.huffingtonpost.com/nathan-newman/taking-on-googlesmonopol_b_3980799.html.

[6] See, e.g., Lina Khan & K. Sabeel Rahman, Restoring Competition in the U.S. Economy, in Untamed: How to Check Corporate, Financial, and Monopoly Power (Nell Abernathy, Mike Konczal, & Kathryn Milani, eds., 2016), at 23 (“From Amazon to Google to Uber, there is a new form of economic power on display, distinct from conventional monopolies and oligopolies…, leverag[ing] data, algorithms, and internet-based technologies… in ways that could operate invisibly and anticompetitively.”); Mark Weinstein, I Changed My Mind—Facebook Is a Monopoly, Wall St. J. (Oct. 1, 2021), https://www.wsj.com/articles/facebook-is-monopoly-metaverse-users-advertising-platforms-competition-mewe-big-tech-11633104247 (“[T]he glue that holds it all together is Facebook’s monopoly over data…. Facebook’s data troves give it unrivaled knowledge about people, governments—and its competitors.”).

[7] See, generally, Abigail Slater, Why “Big Data” Is a Big Deal, The Reg. Rev. (Nov. 6, 2023), https://www.theregreview.org/2023/11/06/slater-why-big-data-is-a-big-deal; Amended Complaint at ¶36, United States v. Google, 1:20-cv-03010- (D.D.C. 2020); Complaint at ¶37, United States v. Google, 1:23-cv-00108 (E.D. Va. 2023), https://www.justice.gov/opa/pr/justice-department-sues-google-monopolizing-digital-advertising-technologies (“Google intentionally exploited its massive trove of user data to further entrench its monopoly across the digital advertising industry.”).

[8] See, e.g., Press Release, European Commission, supra note 4; Krysten Crawford, FTC’s Lina Khan Warns Big Tech over AI, SIEPR (Nov. 3, 2020), https://siepr.stanford.edu/news/ftcs-lina-khan-warns-big-tech-over-ai (“Federal Trade Commission Chair Lina Khan delivered a sharp warning to the technology industry in a speech at Stanford on Thursday: Antitrust enforcers are watching what you do in the race to profit from artificial intelligence.”) (emphasis added).

[9] See, e.g., John M. Newman, Antitrust in Digital Markets, 72 Vand. L. Rev. 1497, 1501 (2019) (“[T]he status quo has frequently failed in this vital area, and it continues to do so with alarming regularity. The laissez-faire approach advocated for by scholars and adopted by courts and enforcers has allowed potentially massive harms to go unchecked.”); Bertin Martins, Are New EU Data Market Regulations Coherent and Efficient?, Bruegel Working Paper 21/23 (2023), https://www.bruegel.org/working-paper/are-new-eu-data-market-regulations-coherent-and-efficient (“Technical restrictions on access to and re-use of data may result in failures in data markets and data-driven services markets.”); Valéria Faure-Muntian, Competitive Dysfunction: Why Competition Law Is Failing in a Digital World, The Forum Network (Feb. 24, 2021), https://www.oecd-forum.org/posts/competitive-dysfunction-why-competition-law-is-failing-in-a-digital-world.

[10] See Rana Foroohar, The Great US-Europe Antitrust Divide, FT (Feb. 5, 2024), https://www.ft.com/content/065a2f93-dc1e-410c-ba9d-73c930cedc14.

[11] See, e.g., Press Release, European Commission, supra note 4.

[12] See infra, Section II. Commentators have also made similar claims; see, e.g., Ganesh Sitaram & Tejas N. Narechania, It’s Time for the Government to Regulate AI. Here’s How, Politico (Jan. 15, 2024) (“All that cloud computing power is used to train foundation models by having them “learn” from incomprehensibly huge quantities of data. Unsurprisingly, the entities that own these massive computing resources are also the companies that dominate model development. Google has Bard, Meta has Llama. Amazon recently invested $4 billion into one of OpenAI’s leading competitors, Anthropic. And Microsoft has a 49 percent ownership stake in OpenAI — giving it extraordinary influence, as the recent board struggles over Sam Altman’s role as CEO showed.”).

[13] Press Release, European Commission, supra note 4.

[14] Comment of U.S. Federal Trade Commission to the U.S. Copyright Office, Artificial Intelligence and Copyright, Docket No. 2023-6 (Oct. 30, 2023), at 4, https://www.ftc.gov/legal-library/browse/advocacy-filings/comment-federal-trade-commission-artificial-intelligence-copyright (emphasis added).

[15] See, e.g. Joe Caserta, Holger Harreis, Kayvaun Rowshankish, Nikhil Srinidhi, & Asin Tavakoli, The Data Dividend: Fueling Generative AI, McKinsey Digital (Sep. 15, 2023), https://www.mckinsey.com/capabilities/mckinsey-digital/our-insights/the-data-dividend-fueling-generative-ai (“Your data and its underlying foundations are the determining factors to what’s possible with generative AI.”).

[16] See, e.g., Tim Keary, Google DeepMind’s Achievements and Breakthroughs in AI Research, Techopedia (Aug. 11, 2023), https://www.techopedia.com/google-deepminds-achievements-and-breakthroughs-in-ai-research; see also, e.g., Will Douglas Heaven, Google DeepMind Used a Large Language Model to Solve an Unsolved Math Problem, MIT Technology Review (Dec. 14, 2023), https://www.technologyreview.com/2023/12/14/1085318/google-deepmind-large-language-model-solve-unsolvable-math-problem-cap-set; A Decade of Advancing the State-of-the-Art in AI Through Open Research, Meta (Nov. 30, 2023), https://about.fb.com/news/2023/11/decade-of-advancing-ai-through-open-research; 200 Languages Within a Single AI Model: A Breakthrough in High-Quality Machine Translation, Meta, https://ai.meta.com/blog/nllb-200-high-quality-machine-translation (last visited Jan. 18, 2023).

[17] See, e.g., Jennifer Allen, 10 Years of Siri: The History of Apple’s Voice Assistant, Tech Radar (Oct. 4, 2021), https://www.techradar.com/news/siri-10-year-anniversary; see also Evan Selleck, How Apple Is Already Using Machine Learning and AI in iOS, Apple Insider (Nov. 20, 2023), https://appleinsider.com/articles/23/09/02/how-apple-is-already-using-machine-learning-and-ai-in-ios; Kathleen Walch, The Twenty Year History Of AI At Amazon, Forbes (Jul. 19, 2019), https://www.forbes.com/sites/cognitiveworld/2019/07/19/the-twenty-year-history-of-ai-at-amazon.

[18] See infra Section III.

[19] See, e.g., Cédric Argenton & Jens Prüfer, Search Engine Competition with Network Externalities, 8 J. Comp. L. & Econ. 73, 74 (2012).

[20] John M. Yun, The Role of Big Data in Antitrust, in The Global Antitrust Institute Report on the Digital Economy (Joshua D. Wright & Douglas H. Ginsburg, eds., Nov. 11, 2020) at 233, https://gaidigitalreport.com/2020/08/25/big-data-and-barriers-to-entry/#_ftnref50; see also, e.g., Robert Wayne Gregory, Ola Henfridsson, Evgeny Kaganer, & Harris Kyriakou, The Role of Artificial Intelligence and Data Network Effects for Creating User Value, 46 Acad. of Mgmt. Rev. 534 (2020), final pre-print version at 4, http://wrap.warwick.ac.uk/134220 (“A platform exhibits data network effects if, the more that the platform learns from the data it collects on users, the more valuable the platform becomes to each user.”); see also, Karl Schmedders, José Parra-Moyano, & Michael Wade, Why Data Aggregation Laws Could be the Answer to Big Tech Dominance, Silicon Republic (Feb. 6, 2024), https://www.siliconrepublic.com/enterprise/data-ai-aggregation-laws-regulation-big-tech-dominance-competition-antitrust-imd.

[21] Nathan Newman, Search, Antitrust, and the Economics of the Control of User Data, 31 Yale J. Reg. 401, 409 (2014) (emphasis added); see also id. at 420 & 423 (“While there are a number of network effects that come into play with Google, [“its intimate knowledge of its users contained in its vast databases of user personal data”] is likely the most important one in terms of entrenching the company’s monopoly in search advertising…. Google’s overwhelming control of user data… might make its dominance nearly unchallengeable.”).

[22] See also Yun, supra note 20 at 229 (“[I]nvestments in big data can create competitive distance between a firm and its rivals, including potential entrants, but this distance is the result of a competitive desire to improve one’s product.”).

[23] For a review of the literature on increasing returns to scale in data (this topic is broader than data-network effects) see Geoffrey Manne & Dirk Auer, Antitrust Dystopia and Antitrust Nostalgia: Alarmist Theories of Harm in Digital Markets and Their Origins, 28 Geo Mason L. Rev. 1281, 1344 (2021).

[24] Andrei Hagiu & Julian Wright, Data-Enabled Learning, Network Effects, and Competitive Advantage, 54 RAND J. Econ. 638 (2023).

[25] Id. at 639. The authors conclude that “Data-enabled learning would seem to give incumbent firms a competitive advantage. But how strong is this advantage and how does it differ from that obtained from more traditional mechanisms…”.

[26] Id.

[27] Bruno Jullien & Wilfried Sand-Zantman, The Economics of Platforms: A Theory Guide for Competition Policy, 54 Info. Econ. & Pol’y 10080, 101031 (2021).

[28] Daniele Condorelli & Jorge Padilla, Harnessing Platform Envelopment in the Digital World, 16 J. Comp. L. & Pol’y 143, 167 (2020).

[29] See Hagiu & Wright, supra note 24.

[30] For a summary of these limitations, see generally Catherine Tucker, Network Effects and Market Power: What Have We Learned in the Last Decade?, Antitrust (2018) at 72, available at https://sites.bu.edu/tpri/files/2018/07/tucker-network-effects-antitrust2018.pdf; see also Manne & Auer, supra note 23, at 1330.

[31] See Jason Furman, Diane Coyle, Amelia Fletcher, Derek McAuley, & Philip Marsden (Dig. Competition Expert Panel), Unlocking Digital Competition (2019) at 32-35 (“Furman Report”), available at https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/785547/unlocking_digital_competition_furman_review_web.pdf.

[32] Id. at 34.

[33] Id. at 35. To its credit, it should be noted, the Furman Report counsels caution before mandating access to data as a remedy to promote competition. See id. at 75. With that said, the Furman Report maintains that such a remedy should certainly be on the table, because “the evidence suggests that large data holdings are at the heart of the potential for some platform markets to be dominated by single players and for that dominance to be entrenched in a way that lessens the potential for competition for the market.” Id. In fact, the evidence does not show this.

[34] Case COMP/M.9660 — Google/Fitbit, Commission Decision (Dec. 17, 2020) (Summary at O.J. (C 194) 7), available at https://ec.europa.eu/competition/mergers/cases1/202120/m9660_3314_3.pdf at 455.

[35] Id. at 896.

[36] See Natasha Lomas, EU Checking if Microsoft’s OpenAI Investment Falls Under Merger Rules, TechCrunch (Jan. 9, 2024), https://techcrunch.com/2024/01/09/openai-microsoft-eu-merger-rules.

[37] Amended Complaint at 11, Meta/Zuckerberg/Within, Fed. Trade Comm’n. (2022) (No. 605837), available at https://www.ftc.gov/system/files/ftc_gov/pdf/D09411%20-%20AMENDED%20COMPLAINT%20FILED%20BY%20COUNSEL%20SUPPORTING%20THE%20COMPLAINT%20-%20PUBLIC%20%281%29_0.pdf.

[38] Amended Complaint (D.D.C), supra note 7 at ¶37.

[39] Amended Complaint (E.D. Va), supra note 7 at ¶8.

[40] Merger Guidelines, US Dep’t of Justice & Fed. Trade Comm’n (2023) at 25, available at https://www.ftc.gov/system/files/ftc_gov/pdf/2023_merger_guidelines_final_12.18.2023.pdf.

[41] Merger Assessment Guidelines, Competition and Mkts. Auth (2021) at  ¶7.19(e), available at https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1051823/MAGs_for_publication_2021_–_.pdf.

[42] Furman Report, supra note 31, at ¶4.

[43] See, e.g., Chris Westfall, New Research Shows ChatGPT Reigns Supreme in AI Tool Sector, Forbes (Nov. 16, 2023), https://www.forbes.com/sites/chriswestfall/2023/11/16/new-research-shows-chatgpt-reigns-supreme-in-ai-tool-sector/?sh=7de5de250e9c.

[44] See Krystal Hu, ChatGPT Sets Record for Fastest-Growing User Base, Reuters (Feb. 2, 2023), https://www.reuters.com/technology/chatgpt-sets-record-fastest-growing-user-base-analyst-note-2023-02-01; Google: The AI Race Is On, App Economy Insights (Feb. 7, 2023), https://www.appeconomyinsights.com/p/google-the-ai-race-is-on.

[45] See Google Trends, https://trends.google.com/trends/explore?date=today%205-y&q=%2Fg%2F11khcfz0y2,%2Fg%2F11ts49p01g&hl=en (last visited, Jan. 12, 2024) and https://trends.google.com/trends/explore?date=today%205-y&geo=US&q=%2Fg%2F11khcfz0y2,%2Fg%2F11ts49p01g&hl=en (last visited Jan. 12, 2024).

[46] See David F. Carr, As ChatGPT Growth Flattened in May, Google Bard Rose 187%, Similarweb Blog (Jun. 5, 2023), https://www.similarweb.com/blog/insights/ai-news/chatgpt-bard.

[47] See Press Release, Introducing New AI Experiences Across Our Family of Apps and Devices, Meta (Sep. 27, 2023), https://about.fb.com/news/2023/09/introducing-ai-powered-assistants-characters-and-creative-tools; Sundar Pichai, An Important Next Step on Our AI Journey, Google Keyword Blog (Feb. 6, 2023), https://blog.google/technology/ai/bard-google-ai-search-updates.

[48] See Ion Prodan, 14 Million Users: Midjourney’s Statistical Success, Yon (Aug. 19, 2023), https://yon.fun/midjourney-statistics; see also Andrew Wilson, Midjourney Statistics: Users, Polls, & Growth [Oct 2023], ApproachableAI (Oct. 13, 2023), https://approachableai.com/midjourney-statistics.

[49] See Hema Budaraju, New Ways to Get Inspired with Generative AI in Search, Google Keyword Blog (Oct. 12, 2023), https://blog.google/products/search/google-search-generative-ai-october-update; Imagine with Meta AI, Meta (last visited Jan. 12, 2024), https://imagine.meta.com.

[50] Catherine Tucker, Digital Data, Platforms and the Usual [Antitrust] Suspects: Network Effects, Switching Costs, Essential Facility, 54 Rev. Indus. Org. 683, 686 (2019).

[51] Manne & Auer, supra note 23, at 1345.

[52] See, e.g., Stefanie Koperniak, Artificial Data Give the Same Results as Real Data—Without Compromising Privacy, MIT News (Mar. 3, 2017), https://news.mit.edu/2017/artificial-data-give-same-results-as-real-data-0303 (“[Authors] describe a machine learning system that automatically creates synthetic data—with the goal of enabling data science efforts that, due to a lack of access to real data, may have otherwise not left the ground. While the use of authentic data can cause significant privacy concerns, this synthetic data is completely different from that produced by real users—but can still be used to develop and test data science algorithms and models.”).

[53] See, e.g., Rachel Gordon, Synthetic Imagery Sets New Bar in AI Training Efficiency, MIT News (Nov. 20, 2023), https://news.mit.edu/2023/synthetic-imagery-sets-new-bar-ai-training-efficiency-1120 (“By using synthetic images to train machine learning models, a team of scientists recently surpassed results obtained from traditional ‘real-image’ training methods.).

[54] Thibault Schrepel & Alex ‘Sandy’ Pentland, Competition Between AI Foundation Models: Dynamics and Policy Recommendations, MIT Connection Science Working Paper (Jun. 2023), at 8.

[55] Igor Susmelj, Optimizing Generative AI: The Role of Data Curation, Lightly (last visited Jan. 15, 2024), https://www.lightly.ai/post/optimizing-generative-ai-the-role-of-data-curation.

[56] See, e.g., Xiaoliang Dai, et al., Emu: Enhancing Image Generation Models Using Photogenic Needles in a Haystack, ArXiv (Sep. 27, 2023) at 1, https://ar5iv.labs.arxiv.org/html/2309.15807 (“[S]upervised fine-tuning with a set of surprisingly small but extremely visually appealing images can significantly improve the generation quality.”); see also, Hu Xu, et al., Demystifying CLIP Data, ArXiv (Sep. 28, 2023), https://arxiv.org/abs/2309.16671.

[57] Lauren Leffer, New Training Method Helps AI Generalize like People Do, Sci. Am. (Oct. 26, 2023), https://www.scientificamerican.com/article/new-training-method-helps-ai-generalize-like-people-do (discussing Brendan M. Lake & Marco Baroni, Human-Like Systematic Generalization Through a Meta-Learning Neural Network, 623 Nature 115 (2023)).

[58] Timothy B. Lee, The Real Research Behind the Wild Rumors about OpenAI’s Q* Project, Ars Technica (Dec. 8, 2023), https://arstechnica.com/ai/2023/12/the-real-research-behind-the-wild-rumors-about-openais-q-project.

[59] Id.; see also GSM8K, Papers with Code, available at https://paperswithcode.com/dataset/gsm8k (last visited Jan. 18, 2023); MATH Dataset, GitHub, available at https://github.com/hendrycks/math (last visited Jan. 18, 2024).

[60] Lee, supra note 58.

[61] Geoffrey Manne & Ben Sperry, Debunking the Myth of a Data Barrier to Entry for Online Services, Truth on the Market (Mar. 26, 2015), https://truthonthemarket.com/2015/03/26/debunking-the-myth-of-a-data-barrier-to-entry-for-online-services (citing Andres V. Lerner, The Role of ‘Big Data’ in Online Platform Competition (Aug. 26, 2014), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2482780).

[62] See Catherine Tucker, Digital Data as an Essential Facility: Control, CPI Antitrust Chron. (Feb. 2020), at 11 (“[U]ltimately the value of data is not the raw manifestation of the data itself, but the ability of a firm to use this data as an input to insight.”).

[63] Or, as John Yun puts it, data is only a small component of digital firms’ production function. See Yun, supra note 20, at 235 (“Second, while no one would seriously dispute that having more data is better than having less, the idea of a data-driven network effect is focused too narrowly on a single factor improving quality. As mentioned in supra Section I.A, there are a variety of factors that enter a firm’s production function to improve quality.”).

[64] Luxia Le, The Real Reason Windows Phone Failed Spectacularly, History–Computer (Aug. 8, 2023), https://history-computer.com/the-real-reason-windows-phone-failed-spectacularly.

[65] Introducing the GPT Store, Open AI (Jan. 10, 2024), https://openai.com/blog/introducing-the-gpt-store.

[66] See Michael Schade, How ChatGPT and Our Language Models are Developed, OpenAI, https://help.openai.com/en/articles/7842364-how-chatgpt-and-our-language-models-are-developed; Sreejani Bhattacharyya, Interesting Innovations from OpenAI in 2021, AIM (Jan. 1, 2022), https://analyticsindiamag.com/interesting-innovations-from-openai-in-2021; Danny Hernadez & Tom B. Brown, Measuring the Algorithmic Efficiency of Neural Networks, ArXiv (May 8, 2020), https://arxiv.org/abs/2005.04305.

[67] See Yun, supra note 20 at 235 (“Even if data is primarily responsible for a platform’s quality improvements, these improvements do not simply materialize with the presence of more data—which differentiates the idea of data-driven network effects from direct network effects. A firm needs to intentionally transform raw, collected data into something that provides analytical insights. This transformation involves costs including those associated with data storage, organization, and analytics, which moves the idea of collecting more data away from a strict network effect to more of a ‘data opportunity.’”).

[68] Discussion Paper, Section 3.1.6, “Consideration for mergers”.

[69] See: Jonathan M. Barnett, “Killer Acquisitions” Reexamined: Economic Hyperbole in the Age of Populist Antitrust, 3 U. Chi. Bus. L. Rev. 39 (2023).

[70] Id. at 85. (“At the same time, these transactions enhance competitive conditions by supporting the profit expectations that elicit VC investment in the startups that deliver the most transformative types of innovation to the biopharmaceutical ecosystem (and, in some cases, mature into larger firms that can challenge incumbents).)”

[71] Cade Metz, Karen Weise, & Mike Isaac, Nvidia’s Big Tech Rivals Put Their Own A.I. Chips on the Table, N.Y. Times (Jan. 29, 2024), https://www.nytimes.com/2024/01/29/technology/ai-chips-nvidia-amazon-google-microsoft-meta.html.

[72] See, e.g., Chris Metinko, Nvidia’s Big Tech Rivals Put Their Own A.I. Chips on the Table, CrunchBase (Jun. 12, 2024), https://news.crunchbase.com/ai/msft-nvda-lead-big-tech-startup-investment.

[73] CMA Seeks Views on AI Partnerships and Other Arrangements, Competition and Mkts. Auth. (Apr. 24, 2024), https://www.gov.uk/government/news/cma-seeks-views-on-ai-partnerships-and-other-arrangements.

[74] AI, of course, is not a market (at least not a relevant antitrust market). Within the realm of what is called “AI”, companies offer myriad products and services, and specific relevant markets would need to be defined before assessing harm to competition in specific cases.

[75] Start-ups, Killer Acquisitions and Merger Control, OECD (2020), available at https://web-archive.oecd.org/2020-10-16/566931-start-ups-killer-acquisitions-and-merger-control-2020.pdf.

[76] Kate Rooney & Hayden Field, Amazon Spends $2.75 Billion on AI Startup Anthropic in Its Largest Venture Investment Yet, CNBC (Mar. 27, 2024), https://www.cnbc.com/2024/03/27/amazon-spends-2point7b-on-startup-anthropic-in-largest-venture-investment.html.

[77] Id.

[78] Tom Warren, Microsoft Partners with Mistral in Second AI Deal Beyond OpenAI, The Verge (Feb. 26, 2024), https://www.theverge.com/2024/2/26/24083510/microsoft-mistral-partnership-deal-azure-ai.

[79] Mark Sullivan, Microsoft’s Inflection AI Grab Likely Cost More Than $1 Billion, Says An Insider (Exclusive), Fast Company  (Mar. 26, 2024), https://www.fastcompany.com/91069182/microsoft-inflection-ai-exclusive; see also, Mustafa Suleyman, DeepMind and Inflection Co-Founder, Joins Microsoft to Lead Copilot, Microsoft Corporate Blogs (Mar. 19, 2024), https://blogs.microsoft.com/blog/2024/03/19/mustafa-suleyman-deepmind-and-inflection-co-founder-joins-microsoft-to-lead-copilot; Krystal Hu & Harshita Mary Varghese, Microsoft Pays Inflection $ 650 Mln in Licensing Deal While Poaching Top Talent, Source Says, Reuters (Mar. 21, 2024), https://www.reuters.com/technology/microsoft-agreed-pay-inflection-650-mln-while-hiring-its-staff-information-2024-03-21; The New Inflection: An Important Change to How We’ll Work, Inflection (Mar. 19, 2024), https://inflection.ai/the-new-inflection; Julie Bort, Here’s How Microsoft Is Providing a ‘Good Outcome’ for Inflection AI VCs, as Reid Hoffman Promised, Tech Crunch (Mar. 21, 2024), https://techcrunch.com/2024/03/21/microsoft-inflection-ai-investors-reid-hoffman-bill-gates.

[80] Canada Leads the World in AI Talent Concentration, Deloitte (Sep. 27, 2023),  https://www2.deloitte.com/ca/en/pages/press-releases/articles/impact-and-opportunities.html.

[81]Government of Canada, Bill C-27, https://www.parl.ca/DocumentViewer/en/44-1/bill/C-27/first-reading.

[82] See e.g., Aaron Wudrick, Government Overregulation Could Jeopardize Canada’s Artificial Intelligence Chances, Globe and Mail (Apr. 1, 2024), https://www.theglobeandmail.com/business/commentary/article-government-overregulation-could-jeopardize-canadas-artificial.

[83] Howard Solomon, Meta May Not Bring Some Products to Canada Unless Proposed AI Law Changed, Parliament Told, IT World Canada (Feb. 8, 2024), https://www.itworldcanada.com/article/meta-may-not-bring-some-products-to-canada-unless-proposed-ai-law-changed-parliament-told/558406.

[84] Elissa Strome, Canada’s Got AI Talent. Let’s Keep It Here, Policy Opinions (Feb. 2, 2024), https://policyoptions.irpp.org/magazines/february-2024/ai-talent-canada.

[85] Joel Blit & Jimmy Lin, Canada’s Planned $2.4-Billion Artificial Intelligence Investment Is Already Mostly Obsolete, Globe and Mail (May 19, 2024), https://www.theglobeandmail.com/business/commentary/article-canadas-planned-24-billion-artificial-intelligence-investment-is.

[86] Lerner, supra note 61, at 4-5 (emphasis added).

[87] See Clayton M. Christensen, The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail (2013).

[88] See David J. Teece, Dynamic Capabilities and Strategic Management: Organizing for Innovation and Growth (2009).

[89] See Hagiu & Wright, supra note 24, at 24 (“We use our dynamic framework to explore how data sharing works: we find that it in-creases consumer surplus when one firm is sufficiently far ahead of the other by making the laggard more competitive, but it decreases consumer surplus when the firms are sufficiently evenly matched by making firms compete less aggressively, which in our model means subsidizing consumers less.”); see also Lerner, supra note 61.

[90] See, e.g., Hagiu & Wright, id. (“We also use our model to highlight an unintended consequence of privacy policies. If such policies reduce the rate at which firms can extract useful data from consumers, they will tend to increase the incumbent’s competitive advantage, reflecting that the entrant has more scope for new learning and so is affected more by such a policy.”); Jian Jia, Ginger Zhe Jin, & Liad Wagman, The Short-Run Effects of the General Data Protection Regulation on Technology Venture Investment, 40 Marketing Sci. 593 (2021) (finding GDPR reduced investment in new and emerging technology firms, particularly in data-related ventures); James Campbell, Avi Goldfarb, & Catherine Tucker, Privacy Regulation and Market Structure, 24 J. Econ. & Mgmt. Strat. 47 (2015) (“Consequently, rather than increasing competition, the nature of transaction costs implied by privacy regulation suggests that privacy regulation may be anti-competitive.”).

Former Enforcers’ Comment on Corporate Consolidation Through Serial Acquisitions and Roll-Ups

As former antitrust enforcers and alumni of the Federal Trade Commission (“FTC”), we are pleased to submit these comments to the FTC and Department of . . .

As former antitrust enforcers and alumni of the Federal Trade Commission (“FTC”), we are pleased to submit these comments to the FTC and Department of Justice’s Antitrust Division (“DOJ”) (collectively, “Agencies”) in response to your Request for Information on Corporate Consolidation Through Serial Acquisitions and Roll-Up Strategies (“RFI”).  We have devoted significant portions of our careers to protecting consumers and competition and we continue to care deeply about the Agencies and their mission.  Moreover, we agree that mergers and acquisitions merit further study and applaud the Agencies for tackling these issues.

We write to suggest several ways in which the Agencies might adjust and supplement the RFI to build confidence in its objectivity and comprehensiveness.  As written, the RFI creates an appearance that the Agencies are mainly seeking negative information about acquisitions, rather than seeking to learn about their benefits to competition as well as their potential harms, and that the Agencies are seeking information about ideological topics untethered from their mission.  Such an approach could distort the Agencies’ perspective, degrade public confidence, and ultimately lead the Agencies to challenge pro-competitive or competitively neutral acquisitions.

I. The Agencies Should Issue a Supplemental RFI to Inquire into the Pro-Competitive Aspects of Serial Acquisitions

As they have in the past, the Agencies should examine mergers and acquisitions in an objective fashion.  In recent years, for example, the Agencies themselves have recognized that mergers “are one means by which firms can improve their ability to compete.”[1]  In one paper, from 2020, the FTC’s staff examined a large potash merger and concluded that the “evidence does not indicate that the firms were able to impose an anticompetitive price increase in the wake of the merger.”[2]  Another retrospective from 2009, into hospital mergers, found mixed results; one merger resulted in higher prices, the other did not.[3]  Finally, a retrospective into grocery mergers found that “mergers in highly concentrated markets are most frequently associated with price increases, while mergers in less concentrated markets are most often associated with price decreases.”[4]  In each instance, the Agencies examined the markets and acquisitions objectively.

The current RFI, however, suggests that the Agencies have already concluded that “serial acquisitions” harm competition.  Although several questions take a neutral approach, many of them solicit negative information about acquisitions, and not one asks about any benefits. For example, Question 2(c) asks whether serial acquisitions encourage “actual or attempted coordination or collusion between competitors” and Question 3 posits nine subparts about ways in which an acquirer might harm competition, including tying and refusals to deal.  By contrast, the RFI includes no questions that solicit information about possible pro-competitive benefits from acquisitions; at most, Question 4 asks the public to identify “claimed” business objectives and whether they came to pass.

Accordingly, we suggest that the Agencies supplement the RFI with additional questions that solicit information about the benefits of serial acquisitions.  Below is proposed Question 6, mirroring existing Question 3:

Proposed Question 6

Serial Acquisition Business Practices (Part 2): If you identified serial acquisitions in the preceding questions, please share whether the acquisitions affected the relevant market in in any of the following ways:

  1. A reduction in price for consumers, either by the acquirer, its competitors, or both;

  2. An increase in output, either by the acquirer, its competitors, or both;

  3. An increase in product offerings, including new varieties of products or products offered at different price points, either from the acquirer, its competitors, or both;

  4. An increase in product quality, either from the acquirer, its competitors, or both;

  5. An increase in investment, financing, or innovation, as measured by patent filings or any other metric, either by the acquirer, its competitors, or both;

  6. An increase in efficiency (e.g., lower unit costs), either by the acquirer, its competitors, or both;

  7. Any other market effects that show the benefits of the acquisitions; and

  8. Any other market effects that show that the acquisitions were competitively neutral in terms of their effect on price, quality, variety, investment, or any other metric.

At a minimum, the addition of these questions, or something similar, would build public confidence that the Agencies are approaching the topic in an objective manner.

Moreover, the answers also could yield valuable, current information about the benefits of acquisitions — and thereby improve the Agencies’ ability to develop better enforcement actions.  In the past, of course, the Agencies have stated that “the vast majority of mergers are either procompetitive and enhance consumer welfare or are competitively benign”[5] and that “[m]ergers are one means by which firms can improve their ability to compete.”[6]  In a policy statement from just a few years ago, the FTC agreed that mergers can promote innovation:

[I]n dynamic sectors characterized by high R&D costs, firms with broad scale and scope may have unique incentives and capabilities to invest in innovation.  For example, where a firm can exploit synergies across product lines or earn returns on research and development projects across multiple geographies, it may have greater incentives to make investments in such projects than firms with more limited operations.[7]

Many other studies agree that mergers can promote competition and innovation.  The Antitrust Modernization Commission,[8] antitrust treatises,[9] and a recent, comprehensive literature survey[10] all have found that mergers can and do advance procompetitive business objectives.  Another recent study found that mergers resulted in more patent applications and investment in research and development. [11]  In the biopharmaceutical industry, for instance, the Congressional Budget Office agreed that “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.”[12]  Numerous recent court decisions also find that mergers can create integration efficiencies that ultimately promote competition and benefit consumers.[13]

II. The Agencies Should Explain or Withdraw Certain Questions that Create an Appearance of Focusing on Ideological Issues Unrelated to Their Statutory Mission

Within the RFI, certain questions may create an appearance that the Agencies are interested in ideological issues unrelated to their statutory mission.  For example, Question 2(d) and its subparts inquire into labor topics unrelated to the rare phenomenon of a labor monopsony, such as “Have workers been reclassified (i.e., from employees to independent contractors) or outsourced to/from third-party providers?” and questions about “work conditions” and “employment stability.”  It is not obvious how any of these questions relate to the Agencies’ statutory mission or historical practice. The RFI cites no statutory provisions or cases, and we are unaware of any, in which a court has found that issues of worker classification, work conditions, or employment stability had any relevance to a merger analysis.

Similarly, Question 5 asks a series of questions about private equity and the role that investors play in managing an acquired company.  Again, the RFI cites no statutory provisions or cases, and we are unaware of any, in which a court has found that the identity of a purchaser as a private equity firm has any relevance to a merger analysis, except to the extent that the firm may own other companies in the same market.

For these reasons, we recommend that the Agencies withdraw these questions or explain their relevance to the antitrust laws and this inquiry.  By narrowing the RFI to topics that relate directly to the antitrust laws and merger analysis, and that have grounding in the statutory language and historical precedent, the Agencies would gather more useful information and would increase public confidence in the necessity and utility of this inquiry.

***

As former enforcers, we strongly support the Agencies’ mission and the importance of vigorous enforcement.  We hope that our suggestions will help the Agencies to improve the quality and utility of the information that they receive in response to this RFI.

Thank you for your attention to these comments.

[1] OECD, Conglomerate Effects of Mergers – Note by the United States to the Organisation for Economic Co-operation and Development (June 4, 2020) at 5, https://www.ftc.gov/system/files/attachments/us-submissions-oecd-2010-present-other-international-competition-fora/oecd-conglomerate_mergers_us_submission.pdf.

[2] See Kreisle, Bureau of Economics, Price Effects from the Merger of Agricultural Fertilizer Manufacturers Agrium and PotashCorp (July 2020), https://www.ftc.gov/system/files/documents/reports/price-effects-merger-agricultural-fertilizer-manufacturers-agrium-potashcorp/working_paper_345.pdf.

[3] See Haas-Wilson and Garmon, Bureau of Economics, Two Hospital Mergers on Chicago’s North Shore: A Retrospective Study (Jan. 2009), at https://www.ftc.gov/sites/default/files/documents/reports/two-hospital-mergers-chicago%E2%80%99s-north-shore-retrospective-study/wp294_0.pdf.

[4] See Hosken et al, Bureau of Economics, Do Retail Mergers Affect Competition? Evidence from Grocery Retailing (Dec. 2012), https://www.ftc.gov/sites/default/files/documents/reports/do-retail-mergers-affect-competition%C2%A0-evidence-grocery-retailing/wp313.pdf.

[5] Statement of Ass’t Att’y Gen. Christine Varney, Merger Guidelines Workshops, Third Annual Georgetown Law Global Antitrust Enforcement Symposium (Sept. 22, 2009).

[6] OECD, Conglomerate Effects of Mergers – Note by the United States to the Organisation for Economic Co-operation and Development (June 4, 2020) at 5, https://www.ftc.gov/system/files/attachments/us-submissions-oecd-2010-present-other-international-competition-fora/oecd-conglomerate_mergers_us_submission.pdf.

[7] Id. at 8.

[8] E.g., Antitrust Modernization Commission Report 57-60, at https://govinfo.library.unt.edu/amc/report_recommendation/amc_final_report.pdf.

[9] 4A Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 10A-1 (5th ed. 2021).

[10] U.S. Chamber, Evidence of Efficiencies in Consummated Mergers (June 1, 2023), at https://www.uschamber.com/assets/documents/20230601-Merger-Efficiencies-White-Paper.pdf.

[11] U.S. Chamber, Mergers, Industries, and Innovation: Evidence from R&D Expenditures and Patent Applications (Feb. 2023), at https://www.uschamber.com/finance/antitrust/mergers-industries-and-innovation-evidence-from-r-d-expenditure-and-patent-applications.

[12]CBO, Research and Development in the Pharmaceutical Industry (Apr. 2021), at https://www.cbo.gov/publication/57126 . .

[13] Microsoft, 2023 WL 4443412, at *11 (citations omitted).  See also U.S. v. Booz Allen Hamilton, Case 1:22-cv-01603-CCB, at 8 n.13 (D. Md. Oct. 17, 2022); Nat’l Fuel Gas Supply Corp. v. FERC, 468 F.3d 831, 840 (D.C. Cir. 2006) (“[V]ertical integration creates efficiencies for consumers”).

Coalition Letter Opposing California SB 1047

We, the undersigned organizations and individuals, are writing to express our serious concerns about SB 1047, the Safe and Secure Innovation for Frontier Artificial Intelligence . . .

We, the undersigned organizations and individuals, are writing to express our serious concerns about SB 1047, the Safe and Secure Innovation for Frontier Artificial Intelligence Systems Act. We believe that the bill, as currently written, would have severe unintended consequences that could stifle innovation, harm California’s economy, and undermine America’s global leadership in AI.

Our main concerns with SB 1047 are as follows:

  1. The application of the precautionary principle, codified as a “limited duty exemption,” would require developers to guarantee that their models cannot be misused for various harmful purposes, even before training begins. Given the general-purpose nature of AI technology, this is an unreasonable and impractical standard that could expose developers to criminal and civil liability for actions beyond their control.
  2. The bill’s compliance requirements, including implementing safety guidance from multiple sources and paying fees to fund the Frontier Model Division, would be expensive and time-consuming for many AI companies. This could drive businesses out of California and discourage new startups from forming. Given California’s current budget deficit and the state’s reliance upon capital gains taxation, even a marginal shift of AI startups to other states could be deleterious to the state government’s fiscal position.
  3. The bill’s definition of a “covered model”–models trained with more than 10^26 floating-point operations at a cost above $100 million-will create confusion, encourage an adversarial relationship between the Frontier Model Division and AI developers, and interfere with industry dynamics in unpredictable ways. First, it is not always straightforward to say what a training run for a model costs. Second, the Frontier Model Division will have an incentive to investigate AI companies’ finances and other records to ensure they are not training covered models, which will create another burden for developers. Finally, it penalizes companies based on the size of their investment in AI: if one company trains a model above the threshold, they will be regulated in perpetuity. Yet because compute costs fall rapidly, a competitor could train a model six months later and be subject to no regulation at all. This is nonsensical.
  4. The bill’s combination of the precautionary principle and liability (both criminal and civil) is incompatible with the way open-source software has been developed and distributed for decades. While this bill would not ban any existing open-source model, it constitutes a gradual legislated phasing out of open-source AI near today’s frontier.

These restrictions on open-source AI models would undermine a key driver of innovation and collaboration in the field. The vast majority of stakeholders, including large tech companies, startups, the broader business community, academia, and civil society organizations like the Center for American Progress, have voiced support for open-source AI development. Open-source AI has also thus far played an essential role in interpretability and safety research; by limiting access to future open-source models, this bill could undermine progress in those vital fields.

We believe that SB 1047, if enacted in its current form, would have a chilling effect on AI research and development in California and potentially across the United States. It could slow down progress in a field that holds immense promise for advancing scientific understanding, improving medicine, and driving economic growth.

While we share the goal of ensuring that AI is developed and deployed responsibly, we urge you to reconsider the approach taken in SB 1047. The bill is also broadly inconsistent with the legislative direction suggested by the United States Senate’s Bipartisan Working Group on AI; if SB 1047 passes, California likely would be an unfortunate outlier in the broader context of American policy stances toward AI. In conclusion, we respectfully request that you either make substantial changes to SB 1047 to address the concerns outlined above or withdraw the bill entirely. We stand ready to work with you to find a path forward that promotes innovation while also ensuring the safe and responsible development of AI technology.

Sincerely,

Neil Chilson, Head of AI Policy,, Abundance Institute

Kristian Stout, Director of Innovation Policy, International Center for Law & Economics

Lisa B. Nelson, CEO, ALEC Action

Logan Kolas, Director of Technology Policy, American Consumer Institute

Daniel Castro, Director, Center for Data Innovation

Taylor Barkley, Director of Public Policy, Abundance Institute

Adam Thierer, Resident Senior Fellow, Technology & Innovation, R Street Institute

Vance Ginn, Ph.D., Former Chief Economist, White House Office of Management and Budget

Jessica Melugin, Director, Center for Technology and Innovation, Competitive Enterprise Institute

Nathan Leamer, Executive Director, Digital First Project

ICLE Comments Re: Request for Information on Consolidation in Health Care Markets

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. . . .

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. 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.

II. Discussion

A. Economic Research and Other Forms of Policy R&D Provide a Critical Foundation for Enforcement Policy

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.

1. Policy investigations

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.

2. Economic research on provider consolidation

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]

B. There Is No Sound Basis for New Substantive Competition Regulations Regarding Health-Care Acquisitions, and the RFI Seems Unlikely to Provide One

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.

C. Vertical Transactions Are Not Generally Anticompetitive

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.

D.  A Provider’s For-Profit or Not-for-Profit Status May Say Little About the Likely Competitive Effects of Mergers or Acquisitions Involving that Provider

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]

E. Various Models of Health-Care Delivery May Be Associated with Complex Tradeoffs

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.

F. The Framing of a Request for Information Can Influence the Quality of the Response

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.

III. Conclusion

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.

LONG FORM WRITING

Dynamic Competition in Broadband Markets: A 2024 Update

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 . . .

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 States,[1] which concluded that:

  • The U.S. broadband market was generally healthy and competitive, with 95.6% of the population having access to high-speed broadband;
  • Concentration metrics are poor predictors of competitiveness—broadband markets can be dynamic and competitive even with only a few providers. Indeed, in some cases, increased concentration can result from efficiency gains and innovation, benefiting consumers through better services; and
  • Municipal broadband often requires significant taxpayer subsidies or cross-subsidies from other municipal enterprises, and is thus an example of “predatory entry,” rather than market competition.[2]

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:

  • More households are connected to the internet;
  • Broadband speeds have increased, while prices have fallen;
  • More households are served by multiple providers; and
  • New technologies like satellite and 5G have expanded internet access and intermodal competition among providers.

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]

  1. The COVID-era Emergency Broadband Benefit’s temporary subsidy was extended indefinitely and renamed the Affordable Connectivity Program (ACP). The IIJA allocated an additional $14 billion to provide subsidies of $30 a month to eligible households;
  2. The IIJA also created and funded the Broadband Equity, Access, and Deployment Program (BEAD), which provides $42 billion to expand high-speed internet access to “unserved” and “underserved” locations; and
  3. The law required the Federal Communications Commission (FCC) to adopt final rules to prevent “digital discrimination” in broadband access based on income level, race, ethnicity, color, religion, or national origin, while also instructing the commission to consider issues of technical and economic feasibility.

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.

II. The Broadband Market Is Competitive and Dynamic

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.

A. Access and Adoption

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.

FIGURE 1: US At-Home Internet Access and Adoption, 2021

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]

  • 8% of locations have access to connections of 25/3 Mbps or greater;
  • 5% of locations have access to speeds of 200/25 Mbps or greater;
  • 5% of locations have access to 1000/100 Mbps speeds; and
  • Only 6.2% of locations are unserved, and 2.6% are “underserved” with connections of less than 100/20 Mbps, as those terms are defined in the IIJA.

FIGURE 2: FCC Recommended Internet Speeds and US Household Access, 2021

SOURCE: Allconnect, ‘Everything You Need to Know;’ FCC, ‘Fixed Broadband Deployment’

FIGURE 3: Typical Maximum Download Speed by Connection Type, 2021 (Mbps)

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.

TABLE 1: US Household Internet Access by Download Speed, 2021

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.

TABLE 2: US Population Fixed-Broadband Access by Number of Providers, 2021

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]

  • In 2018, 73.0% of households had access to 25/3 Mbps speeds from only one or two fixed-broadband providers, and only 21.6% had access from three or more providers. In 2021, only 29.1% of households had access from one or two providers while 69.3% were served by three or more providers. Thus, the number of households served by three or more providers increased by 47.7 percentage points from 2018 through 2021.
  • In 2018, 11.6% of households had no access to 100/20 Mbps speeds and 14.8% had access from three or more fixed broadband providers. In 2021, 5.4% of households had no access, while 21.3% were served by three or more providers. Thus, the number households served by three or more providers increased by 6.5 percentage points from 2018 through 2021.

FIGURE 4: Percentage of US Households Living in Census Blocks with Multiple Provider Options for Fixed-Terrestrial Services (2018 vs 2021)

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]

B. Broadband Prices Continued to Fall, Even as Speeds Increased and Demand Grew During the Pandemic

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]

FIGURE 5: Average Monthly Cost of Broadband (OECD, in $US)

SOURCE: Cable.co.uk, ‘Global Broadband Pricing League Table 2023’

FIGURE 6: Average Monthly Cost of Broadband (OECD, Per Megabit $US)

SOURCE: Cable.co.uk, ‘Global Broadband Pricing League Table 2023’

FIGURE 7: Median Download Speed (OECD, Mbps)

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.

FIGURE 8: Relationship Between Average Monthly Cost of Broadband and Cost Per-Megabit Per-Month (OECD, in $US)

SOURCE: Cable.co.uk, ‘Global Broadband Pricing League Table 2023’

FIGURE 9: Relationship Between Average Monthly Cost of Broadband and Median Download Speed

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]

FIGURE 10: Median Download Speed in the US (Mbps)

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.

  • A National Telecommunications and Information Administration (NTIA) survey of internet use reported the average monthly price that offline households wanted to pay for internet access was approximately $10 per month; roughly 75% of households gave $0 or “none” as their answer.[50]
  • Another NTIA publication reports that households with “no need/interest” in home internet are willing to pay about $6 a month, while those who indicate it is “too expensive” are willing to pay approximately $16 a month.[51]

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]

C. Investment by Broadband Providers Has Remained High

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]

FIGURE 11: US Broadband Provider Capital Expenditures ($B)

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.

FIGURE 12: Increase in Maximum Download Speed Associated with Cable or Digital Subscriber Line Provider Entry or Exit, 2014-2018 (Mbps)

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]

III. Current and Anticipated Policies Affecting Broadband Competition

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.

A. ACP More Effective at Reducing Broadband Costs Than Connecting the Unconnected

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:

  1. to increase at-home internet adoption by unconnected households; and
  2. to maintain internet connections for low-income households at risk of “unadoption” due to unaffordability.[66]

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.

B. Red Tape and Regulation May Stymie BEAD’s Efforts to Expand Broadband Access

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:

  1. Requiring providers to offer low-cost, high-speed plans to all middle-class households using the BEAD-funded network; and
  2. Providing consumer subsidies to defray subscription costs for households ineligible for the Affordable Connectivity Benefit or other federal subsidies.

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:

  • Costs $30 per month or less, inclusive of all taxes, fees, and charges, with no additional non-recurring costs or fees to the consumer;
  • Allows the end user to apply the Affordable Connectivity Benefit subsidy to the service price;
  • Provides download speeds of at least 100 Mbps and upload speeds of at least 20 Mbps, or the fastest speeds the infrastructure is capable of if less than 100 Mbps/20 Mbps;
  • Provides typical latency measurements of no more than 100 milliseconds; and
  • Is not subject to data caps, surcharges, or usage-based throttling.[78]

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%).

FIGURE 13: Internet Adoption and Income

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.

C. Digital-Discrimination Rules

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:

  1. Adopting a disparate-impact standard to define “digital discrimination of access;” and
  2. Subjecting a “broad range” of service characteristics to digital-discrimination rules, including pricing, promotional conditions, terms of service, and quality of service.

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]

D. Title II and Net Neutrality

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:

  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.[98]

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.

E. De-Facto Rate Regulation

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]

F. Pole Attachments

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.

G. Municipal/Co-Op Broadband

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:

  1. adjusted net cash flow (ANCF), which measures the actual cash collected and spent by a fiber project; and
  2. net present value of cash flow from operations (NPV), which discounts cash flow using the project’s weighted average cost of capital.

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.

IV. Conclusion

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.

[80] Id.

[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).

PRESENTATIONS & INTERVIEWS

Brian Albrecht on Greed and Inflation

ICLE Chief Economist Brian Albrecht was a guest on the Qualified Opinions podcast to discuss whether inflation is really the product of greed, whether greater . . .

ICLE Chief Economist Brian Albrecht was a guest on the Qualified Opinions podcast to discuss whether inflation is really the product of greed, whether greater economic means equals less incentive for competition, and what the right approach to antitrust policy should be. Audio of the full episode is embedded below.

Brian Albrecht on Noncompete Agreements and the FTC Ban

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.

Giuseppe Colangelo on Standard-Essential Patents

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.

Brian Albrecht on the FTC Noncompete Ban

ICLE Chief Economist Brian Albrecht was a guest on the Future of Freedom podcast to discuss the Federal Trade Commission’s (FTC) recent decision to ban . . .

ICLE Chief Economist Brian Albrecht was a guest on the Future of Freedom podcast to discuss the Federal Trade Commission’s (FTC) recent decision to ban nearly all noncompete agreements in employment contracts. Audio of the full episode is embedded below.

ISSUE BRIEFS

Open Banking Goes to Washington: Lessons from the EU on Data-Sharing Regimes

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 . . .

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 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

I. Introduction

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.

II. The Open Banking Conundrum: Rationale, Goals, and Challenges

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.

III. The EU Regulatory Framework and Its UK Implementation

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.

A. PSD2 and Its Reform

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]

B. Open Finance Proposal

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]

C. The UK Regime

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.

IV. The CFPB’s Rulemaking on ‘Personal Financial Data Rights’

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]

A. Absence of Justifications for Regulatory Intervention

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.

B. Insights from the EU’s Shortcomings

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]

V. Conclusion: Does the CFPB’s Open Banking Fall Short?

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.

The Effects of Payment-Fee Price Controls on Competition and Consumers

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, . . .

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, 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.

I. Introduction

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).

FIGURE 1: Transactions in a Four-Party Card Model

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.

II. Interchange-Fee Price Controls

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.

A. How Jurisdictions Have Capped Interchange Fees

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.

1. Spain

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.

2. Australia

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]

3. United States

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]

4. European Union

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]

B. Response by Banks

Faced with potentially large losses of revenue, banks adopted numerous strategies to limit their losses, including, most notably:

1. Increasing other fees and interest

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]

2. Reduced card benefits

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]

3. Adjusted product offerings

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]

C. The Effects on Consumers

Interchange-fee caps make the vast majority of consumers worse off, especially those with lower incomes. This outcome primarily arises from several interconnected factors:

1. Higher costs

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]

2. Loss of insurance, other services, and the financial benefits of rewards

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.

3. Lost access to financial services

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.

4. Limited savings passed through to consumers

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.

III. MDR Caps

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.

A. India

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.

1.  Mobile payments in India and the role of MDR

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]

2. Enter UPI

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]

TABLE 1: UPI Transactions by App, April 2024

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.

3. How zero MDR distorts competition

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.

B. Costa Rica

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.

TABLE 2: Interchange Fee and MDR Caps in Costa Rica, 2020-2024

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.

FIGURE 2: Mean MDR for Various Merchants in Costa Rica, 2019-2022 (%)

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]

FIGURE 2: Median MDR for Various Merchants in Costa Rica, 2019-2022 (%)

SOURCE: Author’s calculations based on data from BCCR

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.

IV. Conclusions and Policy Implications

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.

IN THE MEDIA

Geoff Manne on the Loper Decision

ICLE President Geoffrey A. Manne was quoted by the Wall Street Journal in a story about the U.S. Supreme Court’s decision in Loper Bright Enterprises . . .

ICLE President Geoffrey A. Manne was quoted by the Wall Street Journal in a story about the U.S. Supreme Court’s decision in Loper Bright Enterprises v. Raimondo. You can read the full piece here.

“Chevron’s thumb on the scale in favor of the agencies was crucial to their chances of success,” said Geoffrey Manne, president of the International Center for Law and Economics. “Now that that’s gone, their claims are significantly weaker.”

Geoff Manne on the Supreme Court’s Loper Decision

ICLE President Geoffrey A. Manne was quoted by Bisnow in a story about the U.S. Supreme Court’s decision in Loper Bright Enterprises v. Raimondo. You . . .

ICLE President Geoffrey A. Manne was quoted by Bisnow in a story about the U.S. Supreme Court’s decision in Loper Bright Enterprises v. Raimondo. You can read the full piece here.

“This decision will promote stability in the law, granting both industry and the general public much greater certainty in the meaning of statutes,” Geoffrey Manne, the president of the International Center for Law & Economics, said in a statement. “It will also put the onus on the people’s representatives in Congress, rather than unelected bureaucrats, to fix statutes in light of new social problems. This is a win for the rule of law over executive prerogative.”

Geoff Manne on Loper Bright

ICLE President Geoffrey A. Manne was quoted by Think Advisor in a story about the U.S. Supreme Court’s decision in Loper Bright Enterprises v. Raimondo. . . .

ICLE President Geoffrey A. Manne was quoted by Think Advisor in a story about the U.S. Supreme Court’s decision in Loper Bright Enterprises v. Raimondo. You can read the full piece here.

“Under the Chevron doctrine, courts often allowed agencies essentially to determine the extent of their own authority by asserting statutory ambiguity, even in ways that proved inconsistent over time,” said Geoffrey Manne, president of the International Center for Law & Economics, in a statement Friday.

 

Geoff Manne on Overturning Chevron

ICLE President Geoffrey A. Manne was quoted by Fierce Healthcare in a story about the U.S. Supreme Court’s decision in Loper Bright Enterprises v. Raimondo. You . . .

ICLE President Geoffrey A. Manne was quoted by Fierce Healthcare in a story about the U.S. Supreme Court’s decision in Loper Bright Enterprises v. Raimondo. You can read the full piece here.

“This decision will promote stability in the law, granting both industry and the general public much greater certainty in the meaning of statutes,” said Geoffrey Manne, president of The International Center for Law & Economics. “It will also put the onus on the people’s representatives in Congress, rather than unelected bureaucrats, to fix statutes in light of new social problems.

ICLE Statement on the US Supreme Court’s Loper Bright Enterprises Decision

PORTLAND, Ore. (June 28, 2024) – The International Center for Law & Economics (ICLE) offers the following statement on today’s opinion from the U.S. Supreme . . .

PORTLAND, Ore. (June 28, 2024) – The International Center for Law & Economics (ICLE) offers the following statement on today’s opinion from the U.S. Supreme Court in Loper Bright Enterprises v. Raimondo, overturning its earlier Chevron decision.

The following quote can be attributed to ICLE President Geoffrey A. Manne:

With today’s release of the Supreme Court’s Loper Bright opinion, the task of reviewing agency authority under congressional statutes is returned to the courts, where it belongs. Under the Chevron doctrine, courts often allowed agencies essentially to determine the extent of their own authority by asserting statutory ambiguity, even in ways that proved inconsistent over time. This decision will promote stability in the law, granting both industry and the general public much greater certainty in the meaning of statutes. It will also put the onus on the people’s representatives in Congress, rather than unelected bureaucrats, to fix statutes in light of new social problems. This is a win for the rule of law over executive prerogative.

For more on the topic, see the amicus brief filed in the case, joined by Geoffrey Manne, ICLE Director of Law & Economics Programs Gus Hurwitz, ICLE Nonresident Scholar Todd J. Zywicki, and ICLE Academic Advisor Richard Epstein. See, also, Gus’ recent Truth on the Market piece “An Equilibrium-Adjustment Theory of Current Trends in Administrative Law.”

To schedule an interview with Geoff about the topic, contact ICLE Media and Communications Manager Elizabeth Lincicome at 919-744-8087 or [email protected].

Eric Fruits and Kristian Stout on Efforts to Expand Broadband

ICLE Senior Scholar Eric Fruits and Director of Competition Policy Kristian Stout were cited by The Dispatch in a story on problems with federal efforts . . .

ICLE Senior Scholar Eric Fruits and Director of Competition Policy Kristian Stout were cited by The Dispatch in a story on problems with federal efforts to expand broadband deployment. You can read the full piece here.

But there is so much more, which has been documented by the Senate Commerce Committeethe Government Accounting OfficeRandy May of the Free State Foundation, and Eric Fruits and Kristian Stout of the International Center for Law and Economics, among others.

Gus Hurwitz on the Murthy Decision

ICLE Director of Law & Economics Programs Gus Hurwitz was quoted by Salon in a story about the U.S. Supreme Court’s decision in Murthy v. . . .

ICLE Director of Law & Economics Programs Gus Hurwitz was quoted by Salon in a story about the U.S. Supreme Court’s decision in Murthy v. Missouri. You can read the full piece here.

“Over the last couple of years, the Fifth Circuit has become one of the most aggressive circuits for challenging government, power, administrative and state issues, and this is the latest in a string of rebukes that they’ve received,” Gus Hurwitz, a senior fellow at the University of Pennsylvania Carey Law School, said. “There’s a question of how much of this is the Supreme Court being skeptical of and really pushing back on the Fifth Circuit, and how much of this is really case specific?”

…“A lot of folks are trying to read tea leaves,” Hurwitz said. “In this case, the Alito dissent has some language about platforms being private actors not subject to the First Amendment.

…Hurwitz said he questioned if the case would end up being litigated again.

“I wonder how unique it was to the setting of both the COVID era and the 2000 election – a unique moment in our history and the role of the platforms,” he said.

“It’s entirely possible that folks aren’t going to let it go and there will be another bite of this apple,” he continued. “But that would require better facts, better plaintiffs, in order to make that happen. And I don’t know that that’s really likely to happen.”

Geoff Manne on Federal Privacy Legislation

ICLE President Geoffrey A. Manne was cited in a post in AEIdeas about a recent paper he co-authored setting out a compromise proposal for federal . . .

ICLE President Geoffrey A. Manne was cited in a post in AEIdeas about a recent paper he co-authored setting out a compromise proposal for federal privacy regulation. You can read the full piece here.

That post introduced a paper that I recently cowrote with Geoff Manne of the International Center for Law and Economics arguing for an alternative to federal preemption of state law. Contractual choice-of-law provisions could allow businesses to avoid an inefficient regulatory patchwork while fostering a double competition: among businesses to please consumers and among states to supply the best law.

Lazar Radic on Apple and ChatGPT

ICLE Senior Scholar Lazar Radic was quoted by EurActiv on antitrust concerns raised recently about Apple’s integration of ChatGPT. You can read the full piece . . .

ICLE Senior Scholar Lazar Radic was quoted by EurActiv on antitrust concerns raised recently about Apple’s integration of ChatGPT. You can read the full piece here.

Some policymakers worry that big tech firms will dominate AI, through these acquisitions and partnerships with AI startups, despite not being subject to merger rules, said Lazar Radic, senior scholar for competition policy at the International Center for Law & Economics, and adjunct professor of law at IE University.

…A future concern could also be collusion among competitors who share partnerships with the same AI company, such as Apple and Microsoft with OpenAI, said Radic.

“It is important to ensure that these companies do not exchange sensitive information that could distort competition,” he said.

 

Dirk Auer on the DOJ/FTC AI Antitrust Investigation

ICLE Director of Competition Policy Dirk Auer was quoted by Al Jazeera in a story about the U.S. Justice Department and Federal Trade Commission’s investigations . . .

ICLE Director of Competition Policy Dirk Auer was quoted by Al Jazeera in a story about the U.S. Justice Department and Federal Trade Commission’s investigations of alleged antitrust violations in the market for artificial intelligence services. You can read the full piece here.

The cases are part of a major policy shift in the US over the past five years towards favouring more regulation after years of pro-market attitudes, according to Dirk Auer, director of competition policy at the International Center for Law & Economics in Portland, Oregon.

“Enforcers both in the United States and in the European Union are very keen to bring cases in the generative AI space. The way they see it, this is the next big thing, and they think, rightly or wrongly, that they failed to bring competition cases in the early years of Web 2.0 and that led to more concentration in less competitive markets than would otherwise have been the case,” Auer told Al Jazeera.

…Auer said, however, that he was not certain if a case against Nvidia, Microsoft and Open AI would stand up in court.

“There’s two basic problems with these AI cases. The first is that, right now, the generative AI space seems very, very competitive and so that doesn’t make it an ideal target for antitrust intervention,” Auer said.

“The second big one is that these deals with big tech firms appear to be extremely valuable for generative AI startups,” Auer said, adding that more regulation would also mean financing and investment deals would take longer to receive approval, slowing down further research and innovation.

Geoff Manne on the Merger Guidelines

ICLE President Geoffrey A. Manne was cited by the Competitive Enterprise Institute in a timeline about the Federal Trade Commission’s recent turn toward populist rulemaking. . . .

ICLE President Geoffrey A. Manne was cited by the Competitive Enterprise Institute in a timeline about the Federal Trade Commission’s recent turn toward populist rulemaking. You can read the full piece here.

The FTC and US Department of Justice together released the Draft Merger Guidelines in July 2023. The Mercatus Center’s Alden Abbott called the draft “an anti-merger manifesto.” The Draft Guidelines prioritized speculative harms while largely disregarding proven benefits. While focusing on the potential downsides of mergers, the Draft lacked proper consideration of potential gains in efficiency and consumer welfare. Many criticized the Draft Guidelines for its reliance on old case law and ignoring more modern precedent. Geoffrey Manne, president of the International Center for Law & Economics, pointed out that the average year of cases cited (weighted by the number of citations) is 1975.

ICLE on Broadband Competition

ICLE comments to the Federal Communications Commission were cited by Communications Daily in a story about the FCC’s inquiry into the state of competition in . . .

ICLE comments to the Federal Communications Commission were cited by Communications Daily in a story about the FCC’s inquiry into the state of competition in broadband markets. You can read the full piece here.

The broadband market “remains healthy and competitive,” the International Center for Law & Economics commented. However, it warned “new and forthcoming regulations threaten broadband competition by eliminating or proscribing the policies and practices by which providers compete.”

Dirk Auer on AI Competition

ICLE Director of Competition Policy Dirk Auer was cited by ELBlog.pl about reported antitrust investigations into the major artificial intelligence platforms. You can read the . . .

ICLE Director of Competition Policy Dirk Auer was cited by ELBlog.pl about reported antitrust investigations into the major artificial intelligence platforms. You can read the full piece here.

Dirk Auer, an expert in competition policy, suggested that regulators might be preemptively clamping down on AI to counteract previous hesitations in regulating internet giants. Such a proactive stance could diversify competition in search, online retail, and smartphones had it been taken earlier.

…Citing another viewpoint, Auer speculated on the weaker basis for action against OpenAI and outlined likely focal points for lawsuits against Nvidia and Microsoft, concentrating on their reinforcement of the AI industry and internal business tactics.

 

Eric Fruits on Broadband Competition

ICLE Senior Scholar Eric Fruits was quoted by StateScoop in a story about ICLE’s recent report on competition in broadband markets. You can read the . . .

ICLE Senior Scholar Eric Fruits was quoted by StateScoop in a story about ICLE’s recent report on competition in broadband markets. You can read the full piece here.

A paper published this week by the International Center for Law and Economics found that some federal broadband competition policies may be working against each other and confusing those working in telecommunications.

Eric Fruits, a senior scholar at the International Center for Law and Economics and co-author of the paper, told StateScoop that since 2021, more households have connected to the internet than ever before, while broadband speeds have increased and service prices have fallen, he said.

“A lot has changed even in the past few years,” Fruits said. “We’ve had some pretty big broadband investments and that’s led to increases in speed. It’s just been a fairly steady march over the past decade or more of increasing speed, increasing usage.”

The paper also found that more households can buy internet service from multiple providers, compared to 2021, but those options are more scarce in rural communities, he said.

Dirk Auer on the AI Antitrust Investigations

ICLE Director of Competition Policy Dirk Auer was quoted by Quartz in a story about news that Microsoft, Nvidia, and OpenAI are under antitrust investigation . . .

ICLE Director of Competition Policy Dirk Auer was quoted by Quartz in a story about news that Microsoft, Nvidia, and OpenAI are under antitrust investigation by the U.S. Justice Department and Federal Trade Commission. You can read the full piece here.

Antitrust regulators are likely taking preemptive action in the AI space because they regret being late to the game regulating internet giants, said Dirk Auer, director of competition policy at the International Center for Law and Economics. If they’d cracked down on Big Tech internet companies such as Google and Amazon earlier, there would likely be more competition in the search, online retail, and smartphones spaces today.

…A case against Nvidia would likely focus on its in-house business practices such as bundling its AI chips with services and giving rebates to customers, Auer said. Cases against Microsoft and OpenAI would focus on how their deals with other firms have consolidated the AI industry.

OpenAI and Microsoft, Auer said, represent “a crystallization of issues that antitrust authorities are worried about,” such as large, incumbent platforms like Microsoft entering into agreements with AI startups like OpenAI to “essentially protect their market position in that way, or even gain control over those AI startups, and in that way, extend their dominance [over] AI,” Auer said.

Auer thinks regulators’ case against OpenAI would be relatively weak. While OpenAI did not respond to a request for comment, Auer believes the firm would argue that while it’s competing aggressively with rivals, the AI market is too emergent for one player to hold a monopoly just yet.

“So long as that’s the case, I don’t think there’s much of an antitrust issue,” Auer said.

Nvidia, Microsoft, and OpenAI would have to devote substantial resources to compliance rather than creating the latest and greatest AI products, Auer said. That could benefit the AI market by allowing rivals to catch up to their dominant market positions. But those very competitors could catch heat from regulators, as well, given the government’s increasing scrutiny of tech and AI — which would hamper innovation.

ICLE ON SOCIAL MEDIA

June Threads 2024

Threads from ICLE scholars on trending issues for the month of June 2024. As if Loper Bright weren't enough, today also brings another interesting discussion . . .

Threads from ICLE scholars on trending issues for the month of June 2024.