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35 Regulation 2 (2012-2013)

handle is hein.journals/rcatorbg35 and id is 1 raw text is: EDITOR PETER VAN DOREN MANAGING EDITOR THOMAS A. FIREY DESIGN AND LAYOUT DAVID HERBICK DESIGN ARTISTS MORGAN BALLARD, KEVIN TUMA CIRCULATION MANAGER ALAN PETERSON EDITORIAL ADVISORY BOARD Chairman WILLIAM A. NISKANEN (1933-2011) Chairman Emeritus, Cato Institute WILLIAM A. FISCHEL Professor of Economics, Dartmouth College H.E. FRECH III Professor of Economics, University of California, Santa Barbara RICHARD L. GORDON Professor Emeritus ofMineral Economics, Pennsylvania State Universiiy ROBERT W. HAHN Senior Visiting Fellow, Smith School, University of Oxford SCOTT E. HARRINGTON Alan B. Miller Professor, Wharton School, University of Pennsylvania JAMESJ. HECKMAN Henry Schultz Distinguished Service Professor of Economics, University of Chicago JOSEPH P. KALT Ford Foundation Professor ofInternational Political Economy, John F Kennedy School of Government, Harvard University ANDREW N. KLEIT MICASU Faculty Fellow, Pennsylvania State University MICHAEL C. MUNGER Professor of Political Science, Duke University ROBERT H. NELSON Professor of Public Affairs, University of Maryland SAM PELTZMAN Ralph and Dorothy Keller Distingished Service Professor Emeritus of Economics, University of Chicago GEORGE L. PRIEST John M Olin Professor ofLaw and Economics, Yale Law School PAUL H. RUBIN Professor ofEconomics and Law, Emory University JANE S. SHAW Executive Vice President, John William Pope Centerfor Higher Education Policy S. FRED SINGER President, Science and Environmental Policy Project FRED SMITH JR. President, Competitive Enterprise Institute PABLO T. SPILLER Joe Shoong Professor ofInternational Business, University of California, Berkeley RICHARD L. STROUP Professor Emeritus of Economics, Montana State University W. KIP ViscusI University Distinguished Professor of law, Economics, and Management, Vanderbilt University RICHARD WILSON Mallinckrodt Professor of Physics, Harvard University CLIFFORD WINSTON Senior Fellow in Economic Studies, The Brookings Institution BENJAMIN ZYCHER Senior Fellow, Pacific Research Institutte PUBLISHER Edward H. Crane President Cato Institutte REGULATION was first published in July 1977 because the extension of regulation is piecemeal, the sources and targets diverse, the language complex and often opaque, and the volume overwhelming. REGULATION is devoted to analyzing the implications of government regulatory policy and its effects on our public and private endeavors. Net Neutrality: Wrong Remedy, Wrong Illness I've long been a fan of Gerald Faulha- ber's analyses of the telecommunica- tions industry, and his recent article on net neutrality (The Economics of Net- work Neutrality, Winter 2011-2012) is no exception. I just want to supplement his assessment with a few observations. While I have some sympathy for his view that we should wait for market power prob- lems before taking any action, it is important to remember that the enforcer will still be the Federal Communications Commission. A host of Supreme Court decisions in the last decade, most notably Verizon v. Trinko in 2004, made it clear that ifa regulatory agency has authority over competitively relevant conduct, antitrust law should step aside. I find that regrettable, but if that is the law of the land, one could view an FCC rulemak- ing as merely an ex ante statement of how it would rule ex post on broadband conduct practices. We might disagree with the rule, but ifthe FCC is going to be the adjudicator, perhaps it's better to know now what it is likely to do than to cross our fingers. However, I'd go further than Faulhaber and say that were market power the issue, policy is unlikely to be of much relevance, whether antitrust enforcement or FCC. Along with the points he made, I'd add that the main case in recent decades against telecommunications discrimination-the antitrust case against the old AT&T-was predicated on using vertical integration and discrimination to evade such regulation. Since broadband providers face no price regulation, they have every incentive to pro- vide the content their buyers prefer. If market power isn't much of an issue, though, that doesn't mean there aren't other market failures. Faulhaber almost got there in discussing network effects. It's quite possible that the value of broad- band access to me depends on my belief that others will have reasonable access to content I post. This effect is exacerbated by competition, since the more firms there are supplying broadband access, the less incentive any one of them or their cus- tomers have to incorporate a content-side network effect in their decisions. This externality does not justify a strict and costly complete non-discrimination rule, with all the flaws Faulhaber and others have noted. It does, however, suggest poten- tial merit in a less intrusive minimum qual- ity standard that still provides incentives to innovate in order to offer improved quality. I don't knowifthe network benefits ofa mini- mum quality standard exceed the costs of meeting and enforcing the standard and any rent-seeking abuses of the type Faulhaber describes. But that, rather than net neutral- ity, is what we should be talking about. TIM BRENNAN Department ofPublic Policy University ofMaryland, Baltimore County Antitrust Regulators and the Chicago School We found the article by Erwin Blackstone, Larry Darby, andJoseph FuhrJr. (The Case ofDuopoly, Winter 2011-2011) an interest- ing and useful piece on the lack ofempirical or theoretical support for the market struc- ture/performance relationship. Economists focused on antitrust have understood the difficulties in showing such a relationship for decades, but the piece rightly showed how this result extends even to duopolies. Starting with the Reagan revolution, Chicago school insights have dramati- cally reformed merger policy. A sample of data from the Federal Trade Commission indicates that, between 1993 and 2010, the agency challenged three-to-two mergers only 78 percent ofthe time-a high fraction, of course, because often a third firm does provide a strong competitive constraint to the other two, but far from the 100 percent one would expect under the old Structure- Conduct-Performance (S-C-P) school. (See Malcolm B. Coate, Benchmarking the Upward Pricing Pressure Model with Fed- eral Trade Commission Evidence, Journal of Competition Law and Economics, Vol. 7, No. 4 (December 2011.)) In our view, several factors account for this shift. First, in the 1970s, the Chicago school revolution exposed the intellectual bankruptcy of the S-C-P paradigm. Over REGULATION | Spring 2012

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