Jeffrey A. Eisenach

Theories of Broadband Competition

Like the other information technology (IT) markets that comprise the Internet ecosystem, markets for broadband communications services are characterized by rapid innovation, declining costs, product differentiation and the potential for competitive price discrimination, network effects, and “multi-sidedness.” Broadband ISPs make large, sunk cost investments and seek to differentiate their products in order to be able to earn economic returns on those investments. They seek to assemble and/or participate in systems that create new value for consumers, and do so by picking and choosing both the platforms in which they participate and the products with which they interconnect. They experience both supply-side economies of scale and scope and demand-side externalities that create powerful incentives to increase volumes by maximizing system openness, but, as with other IT firms, these incentives do not always outweigh the costs of interoperability. This paper examines the competitive dynamics of broadband through the lens of the economic literature on competition in IT markets. It concludes that broadband markets are shaped by three sets of characteristics that distinguish competition in IT markets from competition in more traditional ones. Like other IT markets, broadband: (1) is characterized by high sunk costs, declining costs, and rapid innovation (dynamism); (2) functions as a complementary component in modular platforms (modularity); (3) is subject to demand-side economies of scope and scale (network effects). It is generally agreed that these characteristics have important implications for competition analysis, including increased focus on market dynamics and on “vertical” relationships among market participants, reduced emphasis on traditional structural presumptions, and the need to assess efficiency and competitive effects of various forms of conduct on a case-by-case basis. One implication of this analysis is that the central metaphor used in the analysis of communications markets today – the notion that broadband networks are uniquely at the “core” of the Internet while content, applications and devices are at the “edge” – is at best misleading, and in any case does not justify differential policy treatment. To the contrary, for purposes of competition analysis, it is no longer possible to distinguish meaningfully between the competitive characteristics of broadband markets and other IT markets. Accordingly, there is no basis for asymmetric regulatory treatment – for ex ante regulation of broadband services and ex post antitrust scrutiny of other IT markets. The unavoidable conclusion is that competition oversight of broadband markets should be conformed to modern antitrust principles.

Letter to Chairman Wheeler: Economic Evidence on Competition in Communications Markets and Implications for Key Policy Issues

Dear Chairman Wheeler:Congratulations on your confirmation as Chairman of the Federal Communications Commission. As economists who study and write about communications policy and regulation, we agree with your comment during your confirmation hearing that “the role of the FCC has evolved from acting in the absence of competition to dictate the market, to promoting and protecting competition with appropriate oversight.” The economic evidence on this point is clear: in all but a few areas, communications networks no longer have the characteristics of natural monopolies, and should no longer be regulated as public utilities. Indeed, the convergence of the communications sector into the dynamic, intensely competitive Internet ecosystem is now virtually complete.We write because we believe these economic facts have important implications for some of the key challenges facing you and the Commission in the months and years ahead.

Estimating the Economic Impact of Repealing the FLSA Companion Care Exemption

Section 13(a)(15) of the Fair Labor Standards Act (FLSA) exempts companion care providers from the FLSA’s minimum wage and overtime provisions, while Section 13(b)(21) exempts live-in workers from its overtime provisions. In December 2011, the Department of Labor proposed to substantially narrow both exemptions, and published a Preliminary Regulatory Impact Analysis (PRIA) which estimates the proposal would have a de minimis effect on both output and employment. We examine the PRIA in detail, and find that it systematically understates the direct costs of the proposed rule in terms of increased wages and various other compliance costs, and understates both the elasticity of demand for companion care labor and the elasticity of demand for companion care services. Specifically, we formally estimate the elasticity of demand for companion care labor, and find demand to be elastic (Ɛ = -1.18), which differs significantly from the PRIA’s estimate (which we show to be erroneous in any case) that demand is highly inelastic (Ɛ = -0.15). Our analysis suggests the deadweight losses from the proposal would far exceed the PRIA’s estimate, and that the costs of the proposal would likely exceed the benefits.

The Effects of Regulation on Economies of Scale and Scope in TV Broadcasting

This paper presents an analysis of the effects of FCC regulations on economies of scale and scope in television broadcasting, including their effects on the production of local news. We conclude that current FCC regulations are limiting, and potential future regulations could further limit, the ability of broadcasters to realize beneficial economies of scale and scope, thereby lowering economic returns to broadcasting, depressing investment below the economically optimal level, significantly reducing the output of news programming, and threatening to shrink the size of the industry. Using standard econometric methods and station-level financial data spanning 1995 through 2009, we find that, all else equal, smaller broadcast stations face higher average costs than larger stations. Specifically, we estimate that, as broadcast stations expand the scale of their operations, output increases approximately 22 percent faster than costs. With this in mind, we analyze the effects of existing and potential regulatory limitations on broadcasters’ ability to evolve their business models so as to realize available economies of scale and scope.

Revenues from a Possible Spectrum Incentive Auction: Why the CTIA/CEA Estimate is Not Reliable

Efforts to estimate revenues from future spectrum auctions are fraught with difficulties. Revenues depend heavily on specific auction characteristics, such as bidding structures and the geographic features of the licenses at auction, making it difficult to use past results to predict future outcomes. Predicting revenues from incentive auctions raises even greater challenges, since the net revenues received by the government depend on the nature and magnitude of the “incentives” offered to current licensees. Based on the information currently available about the FCC’s proposal to use incentive auctions to repurpose spectrum for mobile wireless use, the revenues that might be produced by such an auction are unknowable with any degree of precision.