Antitrust and Vertical Integration in “New Economy” Industries with Application to Broadband Access |
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Authors: | Bruce M Owen |
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Institution: | 1.Stanford University,Stanford,USA;2.Stanford Institute for Economic Policy Research,Stanford,USA |
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Abstract: | 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. |
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