Antitrust and Vertical Integration in “New Economy” Industries with Application to Broadband Access
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Whether the firms that supply Internet hardware and software should face restrictions on the use of their property is an important and controversial policy issue. Advocates of “net neutrality”—including President Obama and the current FCC majority—believe that owners of broadband distribution systems (hardware used to distribute Internet and video services) and producers of certain “must-have” video content should be subject to prophylactic regulation that transcends present-day antitrust law enforcement. In the economic terms that are used in debates on competition policy, the concern is with vertical integration that may give firms both the opportunity (through denial of access or price discrimination) and incentive (increased profit) to restrict competition. This paper’s central point is that virtually every production process in the economy is vertically integrated, and economics predicts changes in the extent of vertical integration—that is, changes in the boundaries of the firm—in response to changes in relative prices, technology, or institutions. Both vertical integration and changes in the extent of vertical integration are benign characteristics of efficient, dynamic, competitive markets. While there is no shortage of theoretical models in which vertical integration may be harmful, most such models have restrictive assumptions and ambiguous welfare predictions—even when market power is assumed to be present. Empirical evidence that vertical integration or vertical restraints are harmful is weak, compared to evidence that vertical integration is beneficial—again, even in cases where market power appears to be present. Thus, it is reasonable to conclude that prophylactic regulation is not necessary, and may well reduce welfare. Sound policy is to wait for ex post evidence of harm to justify interventions in specific cases. Net neutrality, recently enacted by the FCC but subject to judicial review, is an unfortunate idea.
KeywordsAccess Antitrust Broadband Common carrier Contracting Essential facilities Ex ante regulation Firm boundaries Industrial organization Internet Net neutrality New economy Pin factory Schumpeter Vertical integration Vertical restraints
JEL ClassificationK20 K21 K23 L10 L11 L14 L22 L23 L24 L38 L40 L42 L50 L59 L82 L86 L96
The paper has benefitted from useful comments from Thomas Lenard, Greg Rosston, Michael Salinger, Carl Shapiro and Scott Wallsten.
This article is distributed under the terms of the Creative Commons Attribution Noncommercial License which permits any noncommercial use, distribution, and reproduction in any medium, provided the original author(s) and source are credited.
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