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Net neutrality: wrong remedy, wrong illness.

I've long been a fan of Gerald Faulhaber's analyses of the telecommunications industry, and his recent article on net neutrality ("The Economics of Network Neutrality," Winter 2011-2012) is no exception. I just want to supplement his assessment with a few observations.

While I have some sympathy for his view that we should wait for market power problems before taking any action, it is important to remember that the enforcer will still be the Federal Communications Commission. A host of Supreme Court decisions in the last decade, most notably Verizon v. Trinko in 2004, made it clear that if a regulatory agency has authority over competitively relevant conduct, antitrust law should step aside. I find that regrettable, but if that is the law of the land, one could view an FCC rulemaking as merely an ex ante statement of how it would rule ex post on broadband conduct practices. We might disagree with the rule, but if the FCC is going to be the adjudicator, perhaps it's better to know now what it is likely to do than to cross our fingers.

However, I'd go further than Faulhaber and say that were market power the issue, policy is unlikely to be of much relevance, whether antitrust enforcement or FCC. Along with the points he made, I'd add that the main case in recent decades against telecommunications discrimination the antitrust case against the "old" AT&T--was predicated on using vertical integration and discrimination to evade such regulation. Since broadband providers face no price regulation, they have every incentive to provide the content their buyers prefer.

If market power isn't much of an issue, though, that doesn't mean there aren't other market failures. Faulhaber almost got there in discussing network effects. It's quite possible that the value of broadband access to me depends on nay belief that others will have reasonable access to content I post. This effect is exacerbated by competition, since the more firms there are supplying broadband access, the less incentive any one of them or their customers have to incorporate a content-side network effect in their decisions.

This externality does not justify a strict and costly complete non-discrimination rule, with all the flaws Faulhaber and others have noted, It does, however, suggest potential merit in a less intrusive minimum quality standard that still provides incentives to innovate in order to offer improved quality. I don't know if the network benefits of a minimum quality standard exceed the costs of meeting and enforcing the standard and any rent-seeking abuses of the type Faulhaber describes. But that, rather than net neutrality, is what we should be talking about.


Department of Public Policy

University of Maryland, Baltimore County

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Title Annotation:FOR THE RECORD
Author:Brennan, Tim
Geographic Code:1USA
Date:Mar 22, 2012
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