A Holistic Approach to Antitrust and Broadband Regulation

Published March 1, 2006

In its January 2004 decision in Verizon Communications, Inc. v. Law Offices of Curtis V. Trinko, LLP, the U.S. Supreme Court reversed an appeals court’s expansion of antitrust law to cover claims by a telephone customer that Verizon, as the owner of all telephone lines in New York City, was failing to maintain lines leased to competitors. The Court ruled antitrust law should not be expanded to cover such claims.

While the decision settled one case, it opened discussion as to how the FCC and the courts should be charged with evaluating antitrust questions in broadband and telecom, and what scope they should have in the general context of industry regulation.

But taking FCC regulation largely as given and then considering the proper role for antitrust may not go far enough; it raises issues that lead me to consider the interplay between antitrust and regulation more holistically. Given the general agreement that competitive analysis will be a critical element of the government’s involvement with broadband going forward, policymakers should begin to develop consensus regarding which arm of government should conduct that analysis and why.

That competitive analysis must figure prominently in the legal and regulatory treatment of broadband derives largely from the demise (in coherence, at least) of the Communications Act’s scheme for regulating communications services differently depending on how each is classified. This scheme originated when services were provided over specialized networks, each of which was presumed to have unique economic and other characteristics. Broadband and the Internet disrupt this scheme by enabling the introduction of services that do not fit the act’s classifications, and by making services increasingly agnostic as to the underlying network infrastructure.

But policymakers cannot solve this problem simply by creating new classifications, for those would become outdated, too. The logical alternative is to discard the approach of regulating based on service classifications in favor of regulatory intervention predicated on market failures or abuses, i.e., predicated on competitive analysis.

FCC or the Courts?

Assuming government should tailor its involvement with broadband based on competitive analysis, the question becomes: Who should perform that analysis: the FCC, the antitrust authorities, or both?

As some have proposed in the context of reforming the act, there are reasons to believe responsibility for competitive analysis should rest, in the first instance, with the FCC and other agency regulators. This view presumes communications retains elements (often ill-defined) favoring the development of unique expertise to analyze markets in the industry. Thus, agency experts are deemed preferable to generalist courts and prosecutors. Some also favor administrative law because of its tendency, at least historically, to regulate markets prospectively, which provides more certainty for parties expecting to benefit from such regulation.

Alternatively, there are reasons to think antitrust authorities may be best suited to analyze communications markets. Antitrust authorities’ responsibility to police multiple industries may afford them more sophisticated economic knowledge, along with the modesty that comes with knowing first-hand that many actions taken by firms reflect vigorous and legitimate efforts to capitalize on competitive advantage, rather than efforts to undermine competition itself. The process of antitrust, which emphasizes adversarial “discovery” mechanisms and back-end enforcement, also may be better at affording government the detailed information it needs to conduct thorough analyses, while discouraging intervention before mercurial communications markets have settled into a pattern that clearly endangers consumer welfare.

The Holistic Method

Rather than assuming competitive analysis must reside with either the FCC or antitrust authorities, however, more attention should be given to looking at both arms of government simultaneously. Certainly this approach would help identify (and thus eliminate) redundancies that are counterproductive; in a few cases, for example, antitrust might not serve as a useful “backstop” giving the FCC comfort to avoid prospective regulation that skews or squelches investment in broadband and other new technologies.

Moreover, a holistic approach would encourage Congress and other policymakers to pick and choose among the features of antitrust and agency regulation, downplaying features that undermine consumer welfare and emphasizing or replicating features that work well (e.g., importing the rigors of adversarial process to the FCC’s competitive analysis).

Until policymakers begin to look more broadly at where to locate the government’s competitive analysis, debate over Trinko and the role of antitrust generally is likely to mask disagreement regarding the relative institutional competencies of agencies and courts. Policymakers can exploit these competencies more effectively for consumers by identifying the best features of agencies and antitrust authorities and, only then, deciding where in government those features should be deployed to analyze broadband and other evolving communications markets.

Kyle Dixon ([email protected]) is senior fellow and director of the Federal Institute for Regulatory Law and Economics at the Progress & Freedom Foundation. This article is adapted from a PFF blog entry.