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The Evolution of “Competition”: Lessons for 21st Century Telecommunications Policy

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Abstract

For over a century, assessments of competition or the lack thereof have been central to how public policy treats the telecommunications industry. This centrality continues today. Yet, numerous foundational questions about this concept persist. In this paper, we chronicle how the definition of “competition” has evolved in economics and has been applied in the communications arena. The academic literature on competition hits an important inflection point in the mid-20th century with the development of “workable competition”: a term that is equated to “effective competition.” We find that while the concept of “effective competition” is central to policy formation at the FCC, the Commission’s own applications of “effective competition” are inconsistent. Given the centrality of this concept, and its inconsistent applications to date, we draw upon the seminal contributions to the development of the notion of “effective competition” to offer a modern definition suitable for application in 21st century communications markets.

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Notes

  1. In an accompanying article in this volume, Katz (2017) examines the economics of these regulatory changes.

  2. See recent installments of each report at FCC (2014c, 2016a, b) respectively.

  3. Similarly, the repeated mantra of current FCC Chairman Tom Wheeler has been “competition, competition, competition”; he has stated that the FCC’s “competition policy will take the ‘see-saw’ approach: when competition is high, regulation can be low; when competition is low, we are willing to act in the public interest” (Wheeler 2014). Of course, this approach to policy formation provokes the same question that was posed by the Committee.

  4. These collected responses are available at http://energycommerce.house.gov/CommActUpdate.

  5. See, e.g., the responses of Cox Enterprises, FlexJobs, Integra, ITTA, and NARUC.

  6. See, e.g., the responses of: Broadband for America, which stated that there is a “single truth underscor[ing] the importance of any modern communications policy: Fierce competition occurs throughout the Internet eco-system\(\ldots\)” (p. 2); CTIA, which stated “the wireless ecosystem is vibrantly competitive, requiring only continued ‘light touch’ regulations by the FCC” (p. 2); Free State Foundation, which called for a “new Digital Age Communications Act\(\ldots\) that requires the FCC to take into account the existence of the increasing cross-platform, facilities-based intermodal competition that characterizes the digital environment” (p. 3); USTelecom, which stated “Rather than attempting to statutorily define competition\(\ldots\)definition that will inevitably become outmoded in a very short time\(\ldots\)acknowledgement that the communications marketplace has, indeed, become competitive” (pp. 3–4); American Action Forum, which stated “Broadband competition is vigorous, facilities-based and intermodal; while the relevant law is largely siloed” (p. 1).

  7. E.g., in its response, Cellular One advocated for Congressional attention to interconnection, interoperability, the size of geographic wireless licenses and set-asides.

  8. E.g., in its response, AT&T suggested that the focus should not be on “multiple discrete markets for particular inputs” but rather on “the ecosystem as a whole.”

  9. See, e.g., the responses of Alton Drew, Sprint, and the American Enterprise Institute’s Center for Internet, Communications, and Technology Policy.

  10. See, e.g., the responses of Alton Drew and the American Enterprise Institute’s Center for Internet, Communications, and Technology Policy.

  11. See, e.g., the response of Cellular One (p. 1) and the response from the Competitive Carriers Association (p. 19).

  12. See, e.g., Sherman Antitrust Act of 1890, 15 U.S.C. §§ 1–7.

  13. For a more detailed description of the antecedents to Smith’s concept of competition, see, e.g., McNulty (1967).

  14. See, e.g., Smith (1937/1776, p. 423), stating, “\(\ldots\)where the competition is free, the rivalship of competitors, who are all endeavouring to justle [sic] one another out of employment, obliges every man to endeavour to execute his work with a certain degree of exactness.” He goes on to state, “But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry, or rather is precisely the same thing with that exchangeable value. As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.”

  15. Economically “free” entry does not, of course, literally mean that the cost for firms to enter markets is zero but rather that barriers to entry are minimal.

  16. E.g., Ricardo (1811/1887), George (1879/1920, § 2 ¶ 10), Mill (1848).

  17. E.g., Katz and Rosen (1998, pp. 327–331).

  18. This research might be said to originate with Chamberlin (1933), who developed the model of monopolistic competition. See also Robinson (1933).

  19. This is, of course, not to say that significant progress has not been made in the development of specific market models, with particular features, that may be accurately used to understand economic outcomes better in appropriately identified markets. See also the more general theoretical contributions of Boone (2008a, b) as well as studies examining the relationship of competition and economic performance metrics such as investment and innovation; e.g., Schmutzler (2013).

  20. See, e.g., Wilcox (1940).

  21. These flaws included unsatisfactory products, underuse or overuse, inefficient exchange, inefficient production, bad externalities, spoliation, exploitation, unfair tactics, wasteful advertising, irrationality, undue profits or losses, inadequate research, predation, pre-emption, tying arrangements, resale price maintenance, refusals to deal, undesirable discrimination, misallocation of risk, undesirable mergers, undesirable entry, misinformation, inefficient rules of trading, and misregulation.

  22. See, e.g., the Satellite Communications Act of 1962, Public Law No. 87-624, 76 Stat. 419, codified at 47 U.S.C. ch. 6 § 701 et seq, which directed the FCC to “insure effective competition, including the use of competitive bidding where appropriate, in the procurement by the corporation and communications common carriers of apparatus, equipment, and services required for the establishment and operation of the communications satellite system and satellite terminal stations\(\ldots\)” See also An Act of July 5, 1968 to amend section 2306 of title 10, United States Code, to authorize certain contracts for services and related supplies to extend beyond one year, Public Law 90-378, 82 Stat. 289, which permitted the armed forces to enter multi-year contracts so long as, among other requirements, “the use of such a contract will promote the best interests of the United States by encouraging effective competition and promoting economies in operation.”

  23. See, e.g., 48 C.F.R. § 34.001 (1986), which defines effective competition within the Federal Acquisition Regulations System for major acquisitions as, “a market condition that exists when two or more contractors, acting independently, actively contend for the Government’s business in a manner which ensures that the Government will be offered the lowest cost or price alternative or best technical design meeting its minimum needs.” The definition was first added into this section of code in 1986.

  24. Railroad Revitalization and Regulatory Reform Act of 1976, Public Law 94-210, 90 Stat. 31, 45 U.S.C. § 801.

  25. See, e.g., the 1962 Satellite Communications Act, cited in supra note 22, which had instructed the FCC to “insure effective competition.”

  26. Cable Communications Policy Act of 1984, Public Law 98-549, 98 Stat. 2779, codified at 47 U.S.C. § 521 et seq. This Act deregulated the cable industry, with much of the outcome contingent on the presence of effective competition—the definition and determination for which Congress gave authority and mandated the FCC to create.

  27. E.g., the FCC made revisions in 1988 per direction of the U.S. Court of Appeals—after a case brought against the FCC by the American Civil Liberties Union—to require that 100 percent of the community receive three Grade B signals, although they need not necessarily be the same three signals throughout the whole community, and also to use community-wide rather than county-wide data to determine whether a signal qualifies as “significantly viewed.” See FCC (1988).

  28. A “Grade B” broadcast signal was defined as the field strength of a television broadcast station computed in accordance with regulations that were promulgated by the Commission pursuant to 47 USC § 522 (11).

  29. The prevailing argument made by the cable providers at this time in defense of this accusation had two parts: first, that prices had been artificially low during the period of regulation prior to the 1984 Act; and second, that in the period of deregulation, the industry offerings had significantly improved and merited a price increase.

  30. Cable Television Consumer Protection and Competition Act of 1992, Public Law 102-385, 106 Stat. 1460, 1465, codified as amended at 47 U.S.C. §§ 521–555.

  31. The act provided, in addition to the previous three criteria—low penetration, competing providers, or the presence of a municipal provider—of effective competition, a definition for “local exchange carrier effective competition” if a local exchange carrier or its affiliate or any MVPD using the facilities of such carrier or its affiliate offers video programming services directly to subscribers by any means other than direct-to-home satellite service in the franchise area of an unaffiliated cable operator which is providing cable service in that franchise area, but only if the video programming services so offered in that area are comparable to the video programming services provided by the unaffiliated cable operator in that area. See Telecommunications Act of 1996, Public Law 104-104, 110 Stat. 56, 115, § 301(b)(3).

  32. In 1997, for example, the FCC issued decisions determining the presence of effective competition in 45 communities with approximately 300,000 subscribers. The majority of successful effective competition petitions in 1997 were based on the local exchange carrier test for effective competition. See FCC (1998a).

  33. STELA Reauthorization Act of 2014, Public Law 113-200, § 111, 128 Stat. 2059, 47 U.S.C. § 543(o)(1).

  34. The Omnibus Budget Reconciliation Act of 1993, Public Law 103-66, Title VI, § 6002(b), amending the Communications Act of 1934 and codified at 47 U.S.C. § 332(c).

  35. See, e.g., FCC (1995a, 1997, 1998b, 1999).

  36. See, e.g., a statement in the Fourth Report, “While there is still considerable room for further competitive development, the effects of the progress to date are clear” (FCC 1999, p. 10207).

  37. The First Report (FCC 1995a) was composed almost entirely of a discussion of various mobile services and how they complemented each other, with some generalized price ranges for those products and broad subscription statistics, although it did reference goals for how the reporting would improve by the time of the Second Report. By the time of the Fifth Report (FCC 2000), the length of the report had more than quadrupled, and included a much broader selection of sector descriptors. With regard to advancements in data, prior to the Seventh Report, the Commission based its analysis solely on publicly available data sources e.g., FCC (2001); but the Commission incorporated the “Numbering Resource Utilization / Forecast” data in the Seventh Report (FCC 2002), and also conducted a public forum in February 2002 to collect further data.

  38. FCC Chairman issued a statement as part of the report stating, “This is the most comprehensive wireless competition report that the Commission has ever produced and I applaud the efforts of the Wireless Bureau to update, verify, and diversify our data to better capture the state of the marketplace” (FCC 2003, p. 14783).

  39. E.g., Copps remarked: “\(\ldots\) the Report still contains arguments and omissions that trouble me. The central question of the legislation that requires this Report is whether the market is characterized by ‘effective competition.’ Yet again this year, the Report does not provide a useful definition of this term” (FCC 2004, p. 20720). “Congress tasked us with doing ‘an analysis of whether or not there is effective competition’ in commercial mobile services. Yet still we fail to define ‘effective competition’textendash and this limits the ability of the Commission and the Congress to rely on our results” (FCC 2005, p. 16014). “The need for a clearly-stated, objectively-measurable definition of ‘effective competition’ gets more compelling every year\(\ldots\)Our conclusion that competition remains effective [ ] would be more credible if we had defined that term ahead of time and then assessed whether current competition data meets our definition” (FCC 2006, p. 11070, emphasis in original). See also his comments in the Twelfth Report (FCC 2008).

  40. This was in marked contrast to earlier reports that focused more on the weaknesses of the data that underlay previous reports. See, e.g., GAO (2003).

  41. See, e.g., comments from Cellular South, Cricket, the Rural Telecommunications Group, MetroPCS, and Brighthouse Networks, among others on FCC (2009a).

  42. In its response, AT&T went so far as to argue that the task was unnecessary because it was obvious that “any rational definition” would clearly indicate effective competition in the wireless industry and serve as an efficient fulfillment of the FCC’s statutory duty. Thus, AT&T characterized the existence of the inquiry as a “distraction of academic debates on the proper definitional phrasing” (FCC 2009a, AT&T, p. 5).

  43. E.g., AT&T had previously posited that any “rational definition” would surely indicate the presence of effective competition (FCC 2009a, AT&T, p. 5). The change in the FCC’s position also garnered substantive academic criticism; e.g., Faulhaber et al. 2012).

  44. See FCC (2011, 2013, 2014b, 2015d, 2016b).

  45. FCC Commissioner Robert McDowell continued to criticize this decision not to make a finding for/against effective competition until his retirement, and was also joined by Commissioner Ajit Pai, noting, “For what it’s worth, the answer is pretty obvious to me: Yes, there is effective competition” (FCC 2013, p. 4174). Commissioner Ajit Pai and Commissioner Michael O’Rielly were particularly critical of the FCC’s stance at the release of the Eighteenth Report (FCC 2015d), with O’Rielly stating “[it] amazes me that with more than 90 percent of Americans having a choice of four or more wireless providers that we are incapable of concluding, as directed by Congress, whether this industry is competitive” (FCC 2015g), and Pai casting aspersions on the reasons for the FCC’s failure to make a finding of effective competition, “The bottom line: this FCC will never find that there is effective competition in the wireless market, regardless of what the facts show. That’s because doing so would undermine the agency’s goal of expanding its authority to manipulate the wireless market—a goal it can’t accomplish if it deems that market healthy” (FCC 2015f, emphasis in original).

  46. As McNulty (1967) points out, the centrality of rivalry in competition can be traced at least as far back as Smith (1937/1776). See, e.g., Stigler (1957) who observed that the Smithian notion of competition was “in the sense of rivalry in a race—a race to get limited supplies or a race to be rid of excess supplies.”

  47. As a practical matter, this feature of effective competition embodies the prospect that Schumpeterian-style competition for a market (as opposed to the more traditionally-conceived competition within a market) is sufficiently powerful that the market generates desirable performance characteristics despite high ex post levels of market concentration.

  48. This early call for an assessment of the policy effectiveness of market interventions is more recently repeated by the Department of Justice when it noted that “[t]he operative question in competition policy is whether there are policy levers that can be used to produce superior outcomes, not whether the market resembles the textbook model of perfect competition” (2010, p. 11).

  49. See the discussion in Sect. 3.

  50. For evidence of such vacillation in regulatory and deregulatory measures over the past half-century, see Mayo (2013).

  51. Indeed, to the extent that the modern definition focuses policymakers more toward performance-based analysis of communications markets, it is completely consistent with the FCC’s own observation that “market performance metrics provide more direct evidence of competitive outcomes and the strength of competitive rivalry than market structure factors, such as concentration measures” (FCC 2010, ¶10).

  52. See Posner (1976, pp. 127–128).

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Acknowledgements

We thank Tim Brennan, Shane Greenstein, Roger Noll, David Sappington, Armin Schmutzler, Scott Wallsten, and other participants at the Technology Policy Institute and University of Pennsylvania conference on “The Future of the Internet Ecosystem in a Post-Open Internet Order World” that was held January 8, 2016 for helpful suggestions. We also appreciate the support and feedback from Carolyn Brandon, Marcia Mintz, and other scholars of the Georgetown Center for Business and Public Policy. Finally, we are especially grateful to Lawrence White, the Editor, for his carefully considered and value-adding suggestions.

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Authors and Affiliations

  1. Georgetown Center for Business and Public Policy, Georgetown University, 37th & O Streets NW, Washington, DC, 20057, USA

    Amanda B. Delp

  2. McDonough School of Business, Georgetown University, 37th & O Streets NW, Washington, DC, 20057, USA

    John W. Mayo

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  1. Amanda B. Delp
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  2. John W. Mayo
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Correspondence to John W. Mayo.

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Delp, A.B., Mayo, J.W. The Evolution of “Competition”: Lessons for 21st Century Telecommunications Policy. Rev Ind Organ 50, 393–416 (2017). https://doi.org/10.1007/s11151-016-9553-9

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