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Economics at the FCC, 2017–2018: Internet Freedom, International Broadband Pricing Comparisons, and a New Office of Economics and Analytics

Abstract

The Federal Communications Commission’s (FCC’s) current strategic plan lists four priority goals: closing the digital divide; promoting innovation; protecting consumers and public safety; and reforming the FCC’s processes. Economists at the FCC contribute toward the realization of each of these goals, through analysis of the nature and significance of the underlying problems that regulations are intended to solve, as well as assessments of alternative solutions. Three major FCC initiatives demonstrate the role that economic analysis played in Commission decisions in 2017–2018: the Restoring Internet Freedom Order; the new hedonic pricing model that was used in the International Broadband Data Report; and the order that reorganized Commission economists into the Office of Economics and Analytics.

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Notes

  1. The Order is a lengthy document, so we can offer only a summary of the economic analysis here. We urge readers to consult the cited pages of the Order for more extensive discussion and a full set of references to the relevant economic literature.

  2. The “assumption that competition is the best method of allocating resources in a free market recognizes that all elements of a bargain—quality, service, safety, and durability—and not just the immediate cost, are favorably affected by the free opportunity to select among alternative offers.” [National Society of Professional Engineers v. U.S., 435 U.S. 679 (1978)].

  3. This was a Compass Lexecon filing on behalf of several large “incumbent local exchange carriers” (ILECs).

  4. Bresnahan and Reiss (1991, pp. 996, 1006–1007); Pautler (2003); Shelanski (2007, pp. 85, 89); and Collard-Wexler (2013, p. 1006) indicate that in some circumstances increasing the number of firms beyond two has a significant positive competitive impact.

  5. This option is less viable for applications such as gaming and high resolution long-form video.

  6. International Comparison Requirements Pursuant to the Broadband Data Improvement Act (BDIA) [47 U.S.C. § 1303(b)]; See FCC (2018b).

  7. See OECD Broadband Portal (2018).

  8. See, for example, Holmes and Zubak-Skees (2015), Karr (2011), and Miller (2014).

  9. This argument was made forcefully by Ulmer in his comment to Afriat (1972).

  10. Wallsten (2008) reaches the same conclusion. He states, “[A]nalyses must attempt to control for factors that affect broadband supply and demand that policy cannot affect—like population density and income—to test the effects of particular policies”.

  11. Numerous empirical studies incorporate supply and demand factors into a hedonic pricing model. This is a common practice in the field of labor economics, where hedonic wage regressions include both human capital measures and local labor market conditions. For example, see Heckman et al. (2006, Table 1). In industrial organization, Ioannidis and Silver (1999), Anstine (2001), and Uri (2005) control for factors that they expect to be correlated with markups. In addition, Cutler et al. (1999) account for supply and demand factors when estimating the effects of racial segregation on housing prices. And finally, Ruder and To (2004) included supply and demand factors into a hedonic price model for stereo receivers.

  12. These adjustments are also consistent with the Congressional intent of the comparisons. The BDIA statute directs the Commission to choose "international communities comparable to U.S communities with respect to population size, population density, topography, and demographic profiles”. See FCC (2018b).

  13. Fiber deployment costs in South Korea have been estimated to be as low as $110-$170 per location passed, whereas such costs are estimated at $1000-$1300 in Australia. See OECD (2014).

  14. See Bresnahan and Reiss (1991). In this context competitive means that the firms are earning no economic profits and does not imply marginal cost pricing. In industries with substantial fixed costs such as broadband, price will exceed marginal costs.

  15. This discussion assumes that fixed deployment costs are not subsidized by the government. To the extent they are, this may lower the markup required to cover fixed costs and therefore result in lower prices if the market is sufficiently competitive. Many countries do subsidize broadband deployment; however, we did not account for this in our pricing analysis. If we had, the U.S. ranking likely would have improved given the greater governmental broadband subsidization in the comparison countries relative to the United States.

  16. See Krieger (2015) and Chaplin et al. (2016).

  17. Another contributing factor may be the substantially larger public broadcasting sector in Germany and other European countries.

  18. The total investment costs of programming networks were obtained from Kagan: a media research group within S&P Global Market Intelligence. See Kagan (n.d.).

  19. Kagan estimates that 75 percent of U.S. broadband subscribers from the top five publicly reporting multiple system operators (MSOs) subscribe to bundles that can include cable and/or phone.

  20. When pursuing a mixed bundling strategy, firms will generally raise the price of the standalone goods to draw consumers into purchasing the bundled product. See Chen and Riordan (2013).

  21. We considered three measures of content quality: (1) the number of websites in each country’s top-level domain(s) (e.g., “.fr” is the top-level domain in France); (2) the number of web pages in the top-level domain(s); and (3) the percent of the top 10 million web sites that are in each country’s dominant language. Due to the large difference in English content relative to all other languages, we simply entered a dummy variable for whether the country’s dominant language is English into the model to control for content availability. The results do not change substantially if we use the other measures of content quality in the specification instead of the dummy variable. Robustness checks also found that the results do not change significantly if we drop the United States from the estimation sample and then predict prices.

  22. See Diewert et al. (2009).

  23. See Rosen (1974, p. 49).

  24. See Pakes (2003), Feenstra and Hanson (1996), and Anstine (2001). Even if the broadband market is competitive in a country, pricing will still need to be above marginal cost for firms to recover their fixed deployment costs. Also, since broadband is an industry that is characterized by very high fixed costs and by marginal costs that are nearly zero and do not vary significantly by country, we expect that product markups will largely determine the hedonic regression coefficients.

  25. In fact, standard economic models of imperfect competition may result in negative hedonic price coefficients on vertical product characteristics, which imply that higher-quality goods with greater quantities of desirable characteristics may have lower prices. See Erickson (2016).

  26. See Diewert et al. (2009).

  27. Corrado and Ukhaneva (2016) use a similar multilevel model with firm-specific coefficients to compare broadband prices across countries.

  28. Pakes (2003), Diewert et al. (2009) recommend the hedonic imputation approach except when the available degrees of freedom are limited. Our multi-level modeling approach helps alleviate the data limitation issue.

  29. Diewert et al. (2009, p. 169).

  30. We define four standalone products that are classified by the following download speed tiers: at least 200 kbps but less than 10 Mbps; at least 10 Mbps but less than 25 Mbps; at least 25 Mbps but less than 100 Mbps; at 100 Mbps or above. We further define four additional products when these speed tiers are purchased in a video bundle.

  31. One could argue that for fixed broadband, the monthly subscription price should not affect usage since once this price is paid, most plans allow for nearly unlimited usage. However, consumers choose whether to adopt broadband based on their expected monthly data usage and how much they value that usage. If prices are high in a country, then we would expect that consumers with lower expected data usage would select out of subscribing to broadband.

  32. See tables C11 and C12 in the IBDR.

  33. We predicted prices from the hedonic regression for broadband plans at the following download speeds for both standalone and bundled plans: 10 Mbps; 25 Mbps; 100 Mbps; and 1 Gbps. The plans were standardized to be no contract plans with no phone service, a modem rental, and unlimited data usage allowances.

  34. See FCC (2018b, “Appendix C”, paras. 55–59) for a description of this calculation.

  35. The final ranking of the U.S. in mobile was 10th. While we focused here on our fixed broadband analysis, the mobile analysis followed a similar approach but also presented unique challenges that are discussed in FCC (2018b, “Appendix C”).

  36. The working group conducted 32 interviews with FCC managers and staff, and 48 interviews with non-FCC individuals and organizations; the interviews included: former FCC officials; current and former managers from other federal agencies; and representatives from consumer groups, think tanks, and industry associations.

  37. Pautler offers the following response to proposals that would transfer the economists to the FTC’s other bureaus: “The alternative of having economists work in the legal bureaus would more fully ensure that economists’ views would be consistent with those of the lead attorney on projects. For a short time, such a structure might also facilitate technical economic input into matters where the attorneys saw a need for such input, but in the longer term it would cause a deterioration of economists’ skills and would remove any evaluative or independent assessment function of economists at the agency. The separate bureau would provide an opportunity for an independent BE (Bureau of Economics) voice. No such voice would occur if the economists worked directly for attorney staff.” Pautler at 106–107.

  38. Baker served as head of the FTC’s Bureau of Economics during the Clinton administration (1995–1998), and as chief economist of the FCC during the Obama administration (2009–2011).

  39. Also on January 9, 2018, the Commission publicly released proposed language for an order that would establish the Office of Economics and Analytics, to be voted by the Commission on January 30, 2018. This was consistent with procedures that were established by Chairman Pai in which items to be voted by the Commission are made publicly available three weeks prior to the meeting in which they will be voted.

  40. The working group report summarized these tradeoffs as follows: “Benefits of the centralized model include separate review of proposed rules by economist staffers and managers, better use of economist resources (less over- or under-utilization of staff), better professional development (such as mentoring, training, and hiring), and more opportunities for quality research (white papers, for instance). Drawbacks of the centralized model include an increased potential for isolation from the rest of the agency, increased risk of exclusion at the earliest stages of proceedings, and a potential for development of an ‘us vs. them’ mentality within the agency.

    For the disaggregated model, the benefits include keeping the embedded economists well informed about relevant legal and market/industry developments and getting them involved in proceedings at an early stage. The disadvantages of this model include economists lacking independence, and the possibility that the embedded economists are called on simply to support decisions made by non-economists.” (FCC 2018d, pp. 5–6)

  41. The order specifies how several existing offices and divisions within the FCC will be moved to help form the new OEA. The current functions of the Auctions and Spectrum Access Division of the Wireless Telecommunications Bureau will shift to the Auctions Division in OEA. The current functions of the Industry Analysis and Technology Division of the Wireline Competition Bureau will shift to the Industry Analysis Division in OEA. The FCC’s Office of Strategic Planning and Policy Analysis will be eliminated, and its authorities and functions will generally shift to OEA.

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Acknowledgements

We thank all of the staff at the Federal Communications Commission who reviewed or otherwise contributed to this essay. The opinions expressed herein are those of the authors and do not represent those of the Federal Communications Commission or any other members of its staff, or of the George Washington University or any other members of its staff.

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Correspondence to Sean Sullivan.

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Ellig, J., LaFontaine, P., Leighton, W. et al. Economics at the FCC, 2017–2018: Internet Freedom, International Broadband Pricing Comparisons, and a New Office of Economics and Analytics. Rev Ind Organ 53, 681–707 (2018). https://doi.org/10.1007/s11151-018-9672-6

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  • DOI: https://doi.org/10.1007/s11151-018-9672-6

Keywords

  • Broadband
  • FCC
  • Internet freedom
  • Net neutrality
  • Universal service
  • Benefit–cost analysis