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Economics at the FCC, 2013–2014

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Abstract

We present a sample of recent FCC matters of economic interest. These include nonstructural remedies in a number of wireless telecommunications transactions, econometric attempts to identify which schools are likely to have access to fiber broadband, and the implementation of “rural broadband experiments” to improve the effectiveness of subsidy programs to promote universal service. We close with some observations regarding the prominence of vertical concerns in FCC policy assessments.

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Notes

  1. See 47 United States Code (U.S.C.) § 303. Policy objectives that are codified in the Communications Act include the efficient and intensive use of scarce electromagnetic spectrum; the development and rapid deployment of new technologies, products, and services; and the preservation and enhancement of competition. See 47 U.S.C. §§ 157, 309(j), 332(a).

  2. See 47 U.S.C. §§ 214(a), 310(d).

  3. The DOJ reviews telecommunications mergers pursuant to section 7 of the Clayton Act. 15 U.S.C. § 18.

  4. For example, during this time period, T-Mobile acquired prepaid wireless provider MetroPCS (FCC 2013a); a Japanese holding company, Softbank, acquired a majority interest in Sprint, which also acquired 100 % of the stock of Clearwire (FCC 2013c); and AT&T engaged in multiple acquisitions of varying sizes (see for instance, FCC 2013g, 2014a), as well as an assignment of a considerable amount of spectrum to and from Verizon Wireless (FCC 2013f).

  5. FCC (2013d) ¶ 9. GCI would hold a 66-2/3 % equity interest and ACS Wireless would hold the remaining 33-1/3 % in AWN.

  6. Other articles that show that a production joint venture may lead to anticompetitive effects as great as those following a horizontal merger include Reynolds and Snapp (1986), Bresnahan and Salop (1986), and O’Brien and Salop (2000).

  7. Aguelakakis and Yankelevich (2014) note that because downstream prices are generally strategic complements, the effect that an increase in the outside firm’s price has on the demand for the products of the joint venture partners makes it profitable for them to set an input price (and consequently, their respective downstream prices) higher than that which would replicate a horizontal merger.

  8. For example, the applicants’ contractual agreements required AWN personnel to use “aggregated information involving subscribers, churn, and commonly used subscriber metrics” when reporting such information to the AWN Board, whose initial composition would include the chief executives of GCI and ACS Wireless. However, the aggregation of competitively sensitive information for only two competitors when each competitor could easily back out its own information would have provided little cover in ascertaining the other competitor’s competitively sensitive information. See FCC (2013d) ¶ 74.

  9. Cellular Market Areas (CMAs) are the areas in which the Commission initially granted licenses for cellular service. Although partitioning has altered this structure in many license areas, CMAs represent the fact that the Commission’s licensing programs have to a certain degree shaped this market by defining the initial areas in which wireless providers had spectrum on which to base service offerings, and they may therefore serve as a reasonable proxy for where consumers face the same competitors. See, for instance, FCC (2008) ¶ 49 n. 200.

  10. In contrast to the symmetric input joint ventures that are analyzed by Chen and Ross (2003) and Aguelakakis and Yankelevich (2014), which would be expected to lead to symmetric retail price setting, the pricing incentives of GCI and ACS could be expected to diverge following this transaction. With a greater share of AWN net income, GCI might have greater incentive to decrease retail prices given any wholesale price above marginal cost in order to increase the total number of subscribers, which would in turn raise net wholesale income. A lower share of AWN might give ACS Wireless more incentive to increase retail prices in an attempt to increase retail profits, though ACS Wireless would be expected to be constrained by both GCI’s lower price and the subscriber target clause.

  11. During the pendency of this Application, Allied Wireless provided retail wireless voice and data services to approximately 620,000 subscribers. See FCC (2013g) ¶ 2.

  12. The orders that conditionally approved the AT&T/Allied Wireless and AT&T/Leap Wireless transactions were authorized by the FCC’s Wireless Telecommunication Bureau under delegated authority. However, to avoid confusion, throughout the remainder of this article we continue to refer to the FCC in place of the Bureau.

  13. The Commission largely has adopted flexible licensing policies to the extent that they do not mandate any particular technology or network standard for commercial mobile wireless licensees. As a result of this approach, U.S. service providers have deployed different digital network technologies with divergent technology migration paths. The two main technology migration paths have been the GSM path adopted by AT&T and the CDMA path adopted by ATN (FCC 2013b, ¶ 183).

  14. In particular, the FCC required AT&T to divest 10–20 MHz of spectrum in select CMAs in Kansas, Louisiana, Nevada, Texas, and Washington.

  15. To further mitigate harms in existing Leap markets, AT&T additionally committed to offer at least one prepaid rate plan priced below $40 for at least 12 months after the merger’s closing in CMAs in which Leap provided facilities-based CDMA service.

  16. 47 U.S.C. § 214(c). In each of the transactions described above, the FCC imposed a reporting requirement to ensure that the conditions are met (FCC 2013d, ¶¶ 137–138; 2013g, ¶ 99; 2014a, ¶¶ 186–187).

  17. The E-Rate program is one component of the programs that are supported by the Universal Service Fund. For additional information, see: http://www.fcc.gov/guides/universal-service-program-schools-and-libraries.

  18. The SETDA goals were cited by President Obama in the release of the ConnectED initiative plan in June 2013. For full details, refer to: http://www.whitehouse.gov/sites/default/files/docs/connected_fact_sheet.pdf.

  19. The NCES data does not contain any information about connectivity. Rather, it defines a group of schools that we are interested in understanding. NCES also has identifiers for private schools, and the Institute of Museum and Library Services (IMLS) has standardized identifiers for public libraries.

  20. Schools with a rural NCES locale code (41, 42, or 43) were marked as ‘Rural.’ All other schools were marked as ‘Urban’ (Keaton 2012).

  21. Minimum Euclidean distance is calculated geospatially using the point locations of public schools (from NCES) relative to points (addresses, other CAIs), lines (roads, middle mile), and polygons (blocks) from the National Broadband Map. “Middle mile” is the network infrastructure that connects the Internet backbone to the “last mile” consumer network. With the exception of the middle mile data, all files are available for download from http://www.broadbandmap.gov.

  22. Grants were distributed in 2009–2010 with funding from the 2009 American Recovery and Reinvestment Act. $4.7 billion was distributed by NTIA in an effort to support the expansion of broadband infrastructure and promote adoption. For grants that were awarded to multiple states, we divided the grant equally between the states to avoid double-counting.

  23. While connectivity to fiber often implies subscription, we have found schools that are connected to fiber networks that are not subscribers (most often due to cost). At present, understanding broadband adoption among schools is beyond the capacity of this model.

  24. Because of the interaction term, the marginal effect of rurality must be computed separately from the other average marginal effects. The negative sign of the coefficient corresponds to the negative average marginal effect of the interaction term in the first distance category (0–200 m).

  25. Data submitted by the K-12 High Speed Network are available for download at http://www.fcc.gov/encyclopedia/e-rate-modernization-data. The data are a snapshot of the network as of March 11, 2014.

  26. Fiber connectivity was determined by both the connection type and speed. Connections that explicitly contained the word fiber in the connection type field were included, as well as connection types classified as “Carrier Ethernet” with speeds of at least 100 Mbps. All other schools in the dataset were marked as no fiber.

  27. Refer to http://www.fcc.gov/encyclopedia/e-rate-modernization-data to download data. Additional data can be submitted to the FCC via the Electronic Comment Filing System (ECFS) into WC Docket No. 13-184.

  28. For an example of this, refer to the prediction of survivors of the Titanic sinking in Varian (2014).

  29. 47 U.S.C. § 254(b)(1)–(3).

  30. 47 U.S.C. § 254(e)–(f).

  31. See USAC (2014) for annual reports that include financial data.

  32. Only areas that are designated as high-cost are eligible for USF subsidies under the HCF. The high-cost designation and the level of support for any given area are derived from FCC-developed cost models that take into account, among other things, telecommunications input prices, labor costs, building density, geography and terrain.

  33. The $300 million was disbursed in two rounds: $115 million was disbursed in the summer of 2012, and $185 million was disbursed in the summer of 2013.

  34. “Locations” in the context of the Connect America Fund model include all residential locations and all business locations as defined in the GeoResults database, including cell towers. FCC staff members are currently coding the geographic information to determine the total number of unique locations that these projects proposed to serve. The request for expressions of interest was not subject to the Federal Paperwork Reduction Act, so entities were permitted to submit any information that they desired in any format that they desired when they filed their proposals with the FCC. Consequently, geographic information was not submitted in a consistent format across applications (and sometimes was not submitted at all). Furthermore, some entities specified the geographic boundaries of their proposed service areas but did not include the location counts.

  35. In some instances, an entity may be the ILEC in one region and a CLEC in another.

  36. Many carriers proposed building hybrid networks that make use of multiple technologies. Consequently, the cumulative percentages reported for network technology may be \(>\)100 %.

  37. The relatively high tendency of municipal and county governments to propose building hybrid networks might reflect the fact that they feel more constrained than do private entities in defining their service areas. Thus, rather than not serving locations that would be very expensive to serve with fiber, they propose to serve them with more economical services.

  38. Overlapping bids are admittedly less of a concern for the RBEs than for the second round of CAF Phase II, since the former initiative will have a much smaller scale and is expected to attract less participation than will the latter.

  39. Note, however, that “simple” bids can be submitted by simply setting the fixed cost to the desired amount of funding and leaving the per-area prices at zero. Such bids are unlikely to win, though, if competing entities are sophisticated enough to take full advantage of the bid structure.

  40. Farrell and Weiser (2003) provide a critique that is specific to telecommunications policy. The analysis here looks at the SMPT’s assumptions more generally and shows how the failure of one of them may be particularly relevant in telecommunications contexts.

  41. Ordover et al. (1990) offer a strategic model in which vertical integration raises price when the merger of one seller with one buyer forces the remaining buyer to deal with a monopoly seller. The model rests on two assumptions: One is that vertical integration in and of itself makes exclusive dealing credible; and the other, perhaps more important, is that the upstream market is a duopoly. That latter assumption is necessary for vertical integration to force downstream rivals to pay higher prices; it disappears if the upstream firm remains competitive. Brennan (2008) analyzes a setting in which a buyer that obtains exclusivity from multiple upstream firms thereby forces its rivals to pay a higher price for the upstream product; but this is essentially a horizontal theory, mimicking the result that follows if those multiple upstream firms had merged.

  42. Federal Energy Regulatory Commission Order 888 (1996) and Order 2000 (1999). This is why the process of opening electricity markets to competition has been called “restructuring”.

  43. Perry (1980) posited that Alcoa integrated into high elasticity markets downstream aluminum markets to prevent sales back into high cost markets. I thank the editor for suggesting this reference.

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Acknowledgments

We thank Larry White for the invitation to contribute this article to the Review of Industrial Organization. We benefited greatly from suggestions from the editor and the observations of our colleagues, including Michael Byrne, Jonathan Chambers, Kate Dumouchel, Anne Levine, Catherine Matraves, Paroma Sanyal, Susan Singer, and Mark Walker. The opinions expressed in this paper are those of the authors and do not necessarily represent the positions of the Federal Communications Commission or the United States Government.

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Authors and Affiliations

  1. Office of Strategic Planning and Policy Analysis, Federal Communications Commission, Washington, DC, USA

    Allison Baker, Jack Erb & Omar Nayeem

  2. Wireless Telecommunications Bureau, Chief Economists, Federal Communications Commission, Washington, DC, USA

    Aleksandr Yankelevich

  3. Chief Economist, Federal Communications Commission, Washington, DC, USA

    Timothy Brennan

  4. Public Policy and Economics, UMBC, Baltimore, MD, USA

    Timothy Brennan

  5. Resources for the Future, Washington, DC, USA

    Timothy Brennan

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  1. Allison Baker
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  5. Aleksandr Yankelevich
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Correspondence to Timothy Brennan.

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Baker, A., Brennan, T., Erb, J. et al. Economics at the FCC, 2013–2014. Rev Ind Organ 45, 345–378 (2014). https://doi.org/10.1007/s11151-014-9445-9

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