Bruce M. Owen

Television Programming, Monopolistic Competition, and Welfare

Introduction, 103.—Sources of bias in program selection, 106.—Numbers of programs and audience sizes in equilibrium, 114.—Summary of results and policy, 122.

Antitrust and Vertical Integration in ‘New Economy’ Industries with Application to Broadband Access

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 transcending present-day antitrust law enforcement. Their objective is to protect the free and open culture of the Internet from efforts to foreclose or limit competition in the provision of content, including online video services, which they see as potential competition to older video distribution methods. In the economic terms used in debates on competition policy, the concern is with vertical integration which may give firms both the opportunity (through denial of access or price discrimination) and incentive (increased profit) to restrict competition. Antitrust laws already provide tools to deal with such concerns, as illustrated by the antitrust breakup of the old Bell System, designed to remedy precisely these offenses. But, except in merger cases, antitrust usually is an ex post remedy. Do “new economy�? industries have characteristics that make vertical integration so potentially pernicious that ex ante regulation is justified? Or do “new economy�? industries on the contrary exhibit features that make ex ante regulation futile or even dangerous? The air in Washington is alive with contending voices taking sides on these issues. I engage the debate first by attempting to deconstruct the terms “vertical integration�? and “new economy;�? which turn out to be surprisingly elusive concepts. I briefly review theoretical and empirical work on vertical integration as it relates to antitrust policy, especially in “new economy�? industries. I assume that the policy objective is to promote welfare. My goal is to identify circumstances in which vertical integration creates suspicion of adverse welfare effects sufficient to justify prophylactic (ex ante) regulation. The paper’s central point is that virtually every production process in the economy is in part 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 modes 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 is an unfortunate idea.

Competition Policy in Latin America

This paper reports on recent developments in Latin American competition (antitrust) policy from the perspective of the role competition policy in supporting market reform. Competition policy is an instance of the use of law to influence economic behavior. More than eighty nations have enacted antitrust laws in the last twenty years, mostly based on U.S. and E.U. models. A review of the antitrust activity in Latin America shows that all the larger countries have active competition agencies using modern economic theories and procedures that rely chiefly on administrative agencies rather than the courts. The issues mirror those in the developed world, especially competition problems in the infrastructure sectors. Formal laws and regulations also tend to mirror those in the developed world, perhaps inappropriately so in light of the differing economic scales and cultural traditions of Latin American countries. In many Latin American countries increased openness to international trade probably is more important to consumer welfare than increased local competition in tradable goods and services, but receives less attention. Some of the active agencies seem to have been quite successful, with Chile probably the leading example in sectoral reform and Mexico in price fixing and merger enforcement. In both cases there is a substantial national commitment to market reforms. In countries where the political and social commitment to market reforms is more ambivalent, or where other priorities prevail, competition agencies appear to have been less successful. Argentina and Brazil fall into this category. Coordination and regional integration of competition policy, both generally and within the context of the various customs unions (MEROSUR, Andes Pact, Caricom, FTAA, and WTO) remains an unachieved objective. This is a problem because relevant geographic markets in merger and monopoly cases are not, in general, contained in national boundaries and also because benign international mergers are penalized and delayed by the necessity to undergo review in multiple jurisdictions. No Latin American country appears to focus explicitly on the potential for helpful positive and negative incentive effects on economic behavior, and none appears to be engaged in systematic evaluation and measurement of the effects of its policies. Throughout the region, antitrust and other government policies are undercut by the inability of governments and courts to make credible commitments to consistent, transparent decision-making. Still, many Latin American countries are moving in sensible directions by emphasizing well-publicized actions against price fixers, by undertaking competition advocacy programs, and by targeting public sector restraints on competition.

Confusing Success with Access: "Correctly" Measuring Concentration of Ownership and Control in Mass Media and Online Services

In 2003 the Federal Communication Commission (FCC) proposed modest relaxation of its media ownership concentration rules; the proposal aroused heated political opposition and has been partially overturned by Congress and stayed pending appellate review. The purpose of this paper is quite narrow: to explore, from a public policy perspective, measurement issues associated with media ownership concentration in general, and online content control in particular. Measurement is meaningless in a vacuum. Alternative approaches to measurement derive their relative merits chiefly from their ability to assess the phenomenon under study, not from independent or abstract characteristics of the measurement device. In the policy area, the choice of a method of measurement follows from the adoption of a goal, or an understanding of the nature of a problem, rather than the other way around. Media ownership concentration raises two broad policy concerns (1) the problem of market power, which can reduce output and raise prices, reducing both consumer and social economic welfare and (2) the problem of private restrictions of access by suppliers of content that may be unpopular or politically incorrect to audiences, and the closely related issue of government regulation of content and access. The first issue (economic competition) is indistinguishable from that addressed by antitrust policy, and the sophisticated analytical tools of modern antitrust analysis present the best available approach to measurement. The second problem (competition in the market place of ideas, which I call “Miltonian competition”) can also usefully be approach from an antitrust perspective, leading to a different conclusion about sound concentration measurement techniques. In this second context it makes no sense to measure concentration using revenue or audience weights, because any channel that is available to a given consumer is equally valuable as a potential source of politically significant material. Popular channels, by definition, have popular content, but if this popularity arises from consumer choice rather than structural barriers to entry it has no significance in measuring the ease with which politically disruptive ideas can be excluded from the audience. Online content (such as entertainment, news and advertising that is generally not in video format) may belong in the same relevant economic markets as mass media, or not, depending on the actual substitution behavior of customers. If consumers or advertisers would substitute online channels for traditional mass media channels in response to price or quality changes, then both media belong in the same market. Ownership attribution and share measurement would follow the usual antitrust rules. Measuring concentration of control of online content for purposes of assessing restrictions on access by audiences to politically or otherwise unpopular material, and by sources of such material to audiences, requires attention, first, to the facts concerning control. If identifiable commercial entities can restrict access based on content, they should be attributed with control over the portion of transmission capacity they control. On the other hand, if both end users and content suppliers are free to find each other on the Internet, then barriers to Miltonian competition (and consumption of expression) are nil. There remains an empirical question whether use of online communication provides an alternative that users find a good substitute for traditional media for the purpose of seeking out unpopular ideas and minority-taste content. A related empirical issue involves the role played by opinion leaders in facilitating access by mass audiences to un-popular ideas expressed via unpopular channels. Measuring media ownership concentration is a meaningless exercise in the abstract. A necessary predicate is an explicit model or models of how concentration affects policy variables such as consumer welfare or competition in the marketplace of ideas. Only then can a measure of concentration be constructed and tested for empirical consistency with the underlying model(s), with which the concentration data may or may not be consistent. As to consumer welfare in the traditional economic sense, which is positively associated with vigorous competition, traditional antitrust models and measurement techniques are, broadly, as good as it gets; there is no need for a special antitrust approach to media industries. The more controversial and often conflicting policy goals of protecting press freedom from government abridgement and of promoting diversity (or Miltonian competition) present more difficult challenges. If, however, ensuring that citizens have as much access as possible to potentially conflicting views is the objective, then concentration is best measured by counting the noses of independent sources, without regard for their cur-rent economic success. Moreover, in general, concentration in the market place of ideas, properly measured, will be lower than economic concentration.

'To Promote the General Welfare' - Addressing Political Corruption in America

Systemic (but lawful) political corruption reduces well-being and equity in America. Madisonian democracy is no longer capable of containing such corruption. Proposals currently on the table to stem corruption are unlikely to be effective without undermining foundational rights. This essay describes a new approach — regulating the output of corrupted legislative and administrative processes, rather than the inputs. Providing for substantive ex post review of direct and delegated legislation would be far more protective of the “general welfare�? of the People than other reforms, while no more or less difficult to implement.