Policy Documents

The Impact of Regulation on Innovation and Choice in Wireless Communications

Everett Ehrlich, Jeffrey A. Eisenach, Wayne A. Leighton –
November 20, 2009

Proposals to increase regulation of mobile wireless services, for example, by applying “net neutrality” regulation, are often based on claims that such regulation would enhance innovation and increase consumer choice.In fact, they would have the opposite effect. The business practices that would be banned by such regulation are efficient mechanisms for spreading and reducing risk, lowering transactions costs, and enhancing marketing activities, all of which contribute to innovation and choice.

Moreover, product differentiation increases competition and thus contributes both directly and indirectly to consumer choice.  While some types of exclusive agreements and other “discriminatory” practices can theoretically harm competition, the precondition for such harm to occur—i.e., market power in one or more of the affected markets—generally is not present in wireless markets. Hence, the proposed regulations cannot be justified on grounds of market failure.  Rather than increasing innovation and consumer choice, as promised, they would severely disrupt the wireless sector’s highly successful business model and significantly reduce innovation and consumer choice.