A Fairer Playing Field in the New Economy: Creating New Rules for 21st-Century Corporate Might


BY MATTHEW E. SPECTOR

The first year of the Trump administration coincided with dizzying shifts in American commercial institutions. Consolidation of consumer-facing businesses from AT&T and Aetna to Amazon and Disney brought new and increasingly pressing attention to market power—the consolidation of a well-defined market among a few firms, yielding anticompetitive prices that reduce consumer welfare.

Washington has increased public scrutiny into whether Facebook, Google, and other dominant platform companies foreclose competitors, limit avenues to growth, and leverage incumbency to shortchange rivals. However, the concentration and velocity of the social, mobile, and digital media-driven attention economy have exceeded legislators’ oversight capabilities. The Federal Communications Commission (FCC)’s 2017 reversal of net neutrality protections highlighted how market consolidation and regulatory capture have centralized power among the few dominant firms that deliver the connectivity now essential to daily life. In eroding net neutrality—defined as the nondiscrimination of network usage and users by wireline and wireless broadband service providers—the FCC has enabled a market edging closer to a model that watchdogs call the “cable-ization of the Internet.”[1],[2]

The economic and social transformations of 2017 reveal legislative and regulatory structures increasingly ill equipped to measure and marshal the power of the private entities they oversee. The regulatory principles that govern vast swaths of the American economy—the consumer welfare doctrine of the Federal Trade Commission (FTC) and the public interest mandates that govern the FCC—require a reset.

 

The Disappearing Federal Communications Commission

The Communications Act of 1934 designated power to oversee broadcast licensees and ensure broadcasters operate in the “public interest, convenience and necessity.” Establishing the FCC and centralizing regulatory authority, the Act’s “public interest” principle democratized access to the era’s near-instantaneous connectivity through a “common carrier” designation, obligating licensees to transmit all legal content crossing wires and telegraph lines without discrimination to source or interest.[3],[4] Given the scarcity of the broadcast spectrum, privileged licensees were granted commercial power conditioned on the expectation that licensees would serve as “trustees” of the public interest, maintaining diversity and protecting forums for discourse.[5]

Nearly a century later, the 2015 “reclassification” of Internet service providers (ISPs) as “telecommunications services” and utility-esque common carriers sought to extend these same nondiscrimination principles to the Internet. In designating ISPs as subject to the trusteeship mandate, the designation sought to protect vulnerable industries and citizens from internet throttling, blocking, and paid prioritization through “bright line rules.” After nearly a decade of legal jostling over the designation of Internet providers, the Open Internet Order harmonized the regulator’s authority over ISPs in an era when consumers without reliable internet access are left behind.[6]

The harmony would not last. In 2017, the Republican-led FCC affirmed “Restoring Internet Freedom” in a party-line vote, erasing the 2015 designation and reclassifying broadband access as an “information service.”[7] The shift offered ISPs new commercial freedom: a lack of oversight could permit providers to shutter content they don’t want users to see or undermine political and social movements if the companies disagree with the use of their tools.[8] The order might allow cable companies to limit Internet-dependent Main Street innovation, preference platform hegemons, and privilege those who pay for faster commercial connectivity. If it withstands court challenges, FCC Chairman Ajit Pai’s order could allow Comcast and AT&T to limit competition in the buildout of critical next-generation 5G broadband capabilities, protect their market duopolies, and act against the public interest to foreclose competition.

Some free-market advocates cheered the removal of costly regulations that they believe chill broadband investment and threaten next-generation connectivity.[9] Observers like Tyler Cowen argue that banning zero-rating—Internet and wireless company policies that preference certain content providers with “free” data while charging data fees for competitors’ content—and limiting ISPs’ pricing power, for example, unfairly constrain behavior and imbue the FCC with prescriptive powers it cannot manage.[10]

Yet Pai’s decision-making echoes a continued erosion of the public interest principles—diversity, consumer protection, and access—that govern the FCC. The Republican-dominated 115th Congress reversed the Obama-era 2016 Broadband Privacy Order last year, removing barriers against the monetization of user data.[11] The hasty turnaround ended regulations that forced companies to secure “opt-ins” before disclosing data and prevented corporations from unfairly discriminating against those who do not surrender their privacy. The 2017 law even hamstrung the FCC’s ability to create future rules protecting consumer privacy.

With dwindling options for online access—and digital now critical for social, civic, and economic opportunity—the FCC remains in breach of its statutory mandate to ensure broadcasters offer access “in a reasonable and timely fashion.”[12] In adjusting rules to favor media monopolists, the FCC has ignored its “broadcast localism” mandate—that broadcasters serve the interests and local needs of their communities of license—and the “fairness” dimension of the public interest.[13],[14] The commission no longer defines the public interest as its own core interest.

 

New Market Power

Consolidations and new expressions of market power have scrambled decades-old consumer welfare standards. Amazon’s 2017 takeover of Whole Foods gave the data-rich platform a brick-and-mortar foothold in the nation’s highest-income zip codes, expanding a business already “enabled and protected” by scale.[15] Google’s acquisition of the digital advertising services AdMob and DoubleClick cemented its data dominance.[16] Other less-visible anticompetitive structures are more threatening to democracy, like Amazon’s single-source web services contract for the Department of Defense and the “highly oligopolistic market structure for elections machinery.”[17],[18]

Concentrated industries, in which “the four largest firms control between one-third and two-thirds of the market,” grew their share of their sector’s revenue from nearly one-quarter in 1997 to approximately one-third in 2012.[19] In 2017, Google and Facebook were responsible for 60 percent of US digital advertising market revenue and nearly half of all digital advertising revenue worldwide.[20] The challenge has drawn executive branch attention. In 2016, the Obama White House underscored these concerns, including trends toward decreasing competition and business dynamism as well as high barriers to market entry, and directed agencies to protect more competitive markets and informed consumers.[21],[22]

“The economic recovery has been stagnant in this era where corporate profits are at record highs; the companies are sitting on this cash—they’re not investing,” said Open Markets Institute’s Lina Khan when we spoke in person.[23]

These economic conditions were what Khan called “weird dynamics,” and they are driving economists to more closely examine how excessive market power is governing the economy and “waking up to a phenomenon that is now a systemic feature of our economy.”

While platform companies and the new era of consolidation have led to confusion, economic theory is evolving. In recent years, academic work on oligopolies and competition has shed light on lawmakers’ options as they appraise these “weird dynamics” and norms. In studies of competition, Nobel Prize–winning economist Jean Tirole defined these two-sided platforms as technology-based exchanges in which the power of “free” can attract customers while also allowing platforms to attract advertisers and define a market. Tirole’s formulation of the new dimensions of competition attempts to explain why classic competition policy fails to explain the appeal of Amazon; buyers or users of these services are not often aware of the cost of “free”—often a loss of privacy, personal tracking, and an implicit opt-in with personal data leveraged for targeted advertising. Regulators too are ill equipped to measure these exchanges through traditional means.[24],[25]

Amazon-Whole Foods illustrated the emergent problems of two-sided markets to a growing antimonopoly crowd. Detailing Amazon’s antitrust paradox, Khan addressed difficult-to-regulate rent-seeking behavior, concluding that new measures must supplant the consumer welfare provision “oriented around preserving a competitive process and market structure.” Khan’s solution would limit further vertical integration by platforms and refocus beyond welfare and pricing to the “ills and hazards” anticompetitive markets create.[26]

Khan told me, “[the platform companies] have done a phenomenal job of being perceived [as] uniformly beneficial and uniformly benign.”[27] For Amazon, this has meant horizontal concentration of data through its dominant Amazon Web Services platform and threatening sector after sector by recycling profits, and often losing money, to offer consumer products at below-market rates. Amazon’s near-perfect price discrimination and data dominance, Khan argues, advance beyond antitrust’s consumer welfare provisions. How do antitrust and competition enforcers measure unfair price effects when the impacts are almost uniformly beneficial to consumers?

 

Interventions

During the Great Depression, libertarian Henry Calvert Simons argued “the great enemy of democracy is monopoly, in all its forms.”[28] Today, unconstrained market power, as well as the FTC and the FCC’s complexity and political capture, risk shortchanging intervention, opportunity, and innovation. As New York Magazine writer and Facebook observer Max Read shared, “the government needs to take a long, hard look at its relationship to the mega-platforms of the Internet.”[29]

The Consumer Financial Protection Bureau (CFPB) might serve a useful policy model constraining excessive market power.[30] The CFPB balanced the need for reform with visible change and market certainty. A similar legislative intervention could empower a watchdog to protect and enforce consumer and citizen “public interest” and “consumer welfare” mandates.

As Senator Elizabeth Warren, the architect of the CFPB, argued in 2016, “competitive markets generate so many benefits on their own that the government’s only role in those markets should be simple and structural—prevent cheating, protect taxpayers, and maintain competition.”[31] The idea appears to be taking root; the Democrats’ 2018 policy platform proposes a “21st-century ‘trust buster’ to stop abusive corporate conduct.”[32]

“[Lawmakers] haven’t yet figured out a moral framing that monopolization and these concentrations of power are a threat to our democracy and our way of life,” Matt Stoller, a fellow at the Open Markets Institute, said. “Public institutions need to step up to structure private power.”[33]

Given its guidance around norms, Stoller said, the FTC could release new merger guidelines that reflect these market structure risks. These guidelines could harmonize with the original intent antimonopoly doctrine—reflecting the social impacts of anticompetitive market concentration—to bring enforcement into alignment with the multisided platforms of the 21st century.

Legislative action can affirm bright line rules and build oversight capacity that would keep pace with the new economy by bridging network and platform regulators. With new tools to assess anticompetitive behavior and ultimately enforce interventions, regulators could adopt a hypothesis-driven, “agile” approach akin to the “regulatory sandboxes” and “stress tests” that the Obama administration used to monitor the financial sector. With stress tests for platform companies, regulators could disclose assessments of market concentration and consumer options, empowering advocates and citizens to publicly marshal market behavior.

Legislators have signaled growing bipartisan support for challenging the Pai FCC’s net neutrality reversal but must bring a substantive and politically feasible replacement to the table.[34] Movement on standards is also underway: in December 2017, Rep. Keith Ellison (D-MN) introduced the Merger Retrospective Act to empower the FTC and US Department of Justice to legibly “report on their overall enforcement record” to consumers and constituents. In countering the effects of a “new Gilded Age,” the bill would also compel the agencies to assess and make publicly available data on price, product quality, and availability changes as a result of the mergers.[35]

Legislators must act quickly and in a bipartisan manner. Given the political economy of corporate power, a legislative solution might face the same challenge as regulatory solutions—including moneyed interests leveraging PAC funding to co-opt stakeholders. Google spent a record sum influencing the federal government in 2017, and the technology sector itself reached a new advocacy record of $50 million last year.[36]

 

Bottom Line

Legislators must synchronize and modernize consumer welfare and public interest standards or risk further alienating the electorate. Indeed, interest in antimonopoly protections is unlikely to ebb, nor will arguments toward constraining the new networks and the companies that leverage them.

Policy makers can no longer afford to overlook the economic effects of excessive market power and the real costs of ignoring the public interest. Concentrations of wealth and market power in the hands of a few Americans and corporations continue to drive political will, action, and attention. In a regulation-averse administration, policy makers and watchdogs must become fluent in competition doctrine and seize the moment to generate a new definition of consumer welfare. Students of policy will need to become accustomed to the intricacies of competition and telecommunications jurisprudence and novel guidance that might be necessary to protect constituents and consumers in the evolution of industries to come.

 

Matthew Spector is a master in public policy candidate at the John F. Kennedy School of Government at Harvard University and most recently served as a visiting researcher in Governance Studies at the Brookings Institution. A member of the Hillary for America technology and innovation committee, Matthew leads content and engagement for the Belfer Center for Science and International Studies Defending Digital Democracy Project. His work has appeared in ABC News, the Washington Post, WBUR Cognoscenti, and WIRED.

 

Photo credit: William Warby from Flickr


[1] Anna G. Eshoo, “Net neutrality repeal means you’re going to hate your cable company even more,” USA Today, 12 December 2017, https://www.usatoday.com/story/opinion/2017/12/12/net-neutrality-repeal-means-internet-like-cable-tv-high-prices-few-choices-anna-eshoo-column/942013001/.

[2] Tim Wu, “A Proposal for Network Neutrality,” June 2002, accessed 5 February 2018, http://www.timwu.org/OriginalNNProposal.pdf.

[3] Communications Act of 1934, 47 U.S.C. § 151 (1934).

[4] Arturo J. Carillo and Dawn C. Nunziato, “The Price of Paid Prioritization: The International and Domestic Consequences of the Failure to Protect Net Neutrality in the United States,” Georgetown Journal of International Affairs 16 (2015): 98.

[5] “Section II: The Public Interest Standard in Television Broadcasting,” UNT Libraries, accessed 3 January 2018, http://govinfo.library.unt.edu/piac/novmtg/pubint.htm.

[6] FCC 15-24 (2015).

[7] Cecilia Kang, “F.C.C. Repeals Net Neutrality Rules,” The New York Times, 14 December 2017, https://www.nytimes.com/2017/12/14/technology/net-neutrality-repeal-vote.html.

[8] Gigi Sohn, “Breaking down the FCC’s proposal to destroy net neutrality,” The Verge, 24 May 2017, https://www.theverge.com/2017/5/24/15685414/net-neutrality-fcc-nprm-explained.

[9] Chris Morran. “FCC Chair Claims Broadband Investment At Historic Low Level Because Of Net Neutrality; That’s Not What The Numbers Say,” Consumerist, 28 February 2017, https://consumerist.com/2017/02/28/fcc-chair-claims-broadband-investment-at-historic-low-level-because-of-net-neutrality-thats-not-what-the-numbers-say/.

[10] Tyler Cowen, “Further thoughts on why the end of net neutrality will be fine,” Marginal Revolution, 23 November 2017, http://marginalrevolution.com/marginalrevolution/2017/11/points-net-neutrality.html.

[11] Pub. L. No. 115-22, 131 Stat. 88 (2017).

[12] “Broadband and Sec 706,” Cybertelecom Federal Internet Law & Policy, Cybertelecom.org, accessed 30 December 2017, http://www.cybertelecom.org/broadband/706.htm.

[13] FCC Consumer Facts: Broadcasting and Localism (Washington, DC: Federal Communications Commission, accessed 30 December 2017, https://transition.fcc.gov/localism/Localism_Fact_Sheet.pdf.

[14] Klint Finley, “FCC Wants to Ease Rules to Benefit Broadcast Giant Sinclair,” WIRED, 27 October 2017, https://www.wired.com/story/fcc-wants-to-ease-rules-to-benefit-broadcast-giant-sinclair/.

[15] Ben Thompson, “Amazon’s New Customer,” Stratechery, 19 June 2017, https://stratechery.com/2017/amazons-new-customer/.

[16] Jonathan Taplin, “Is It Time to Break Up Google?” The New York Times, 22 April 2017, https://www.nytimes.com/2017/04/22/opinion/sunday/is-it-time-to-break-up-google.html.

[17] Matt Stoller, interview by author, 18 January 2017.

[18] Casey Given, “The military may offer Amazon a $5 billion contract without accepting outside bids,” Washington Examiner, 29 November 2017, http://www.washingtonexaminer.com/the-military-may-offer-amazon-a-5-billion-contract-without-accepting-outside-bids/article/2642078.

[19] The Data Team, “Corporate concentration,” The Economist, 24 March 2016, https://www.economist.com/blogs/graphicdetail/2016/03/daily-chart-13.

[20] “Why Google and Facebook Prove the Digital Ad Market Is a Duopoly,” Fortune, 28 July 2017, http://fortune.com/2017/07/28/google-facebook-digital-advertising/.

[21] Benefits of Competition and Indicators of Market Power (Washington, DC: Council of Economic Advisors, The White House, 2016).

[22] “Executive Order — Steps to Increase Competition and Better Inform Consumers and Workers to Support Continued Growth of the American Economy,” press release, Office of the Press Secretary, The White House, 15 April 2016, accessed 8 January 2018, https://obamawhitehouse.archives.gov/the-press-office/2016/04/15/executive-order-steps-increase-competition-and-better-inform-consumers.

[23] Lina Khan, interview by author, 4 December 2017.

[24] Jean-Charles Rochet and Jean Tirole, “Platform Competition in Two-Sided Markets,” European Economic Association, accessed 26 February 2018, http://www.rchss.sinica.edu.tw/cibs/pdf/RochetTirole3.pdf.

[25] Claire Cain Miller, “How Jean Tirole’s Work Helps Explain the Internet Economy,” The New York Times, 14 October 2014, https://www.nytimes.com/2014/10/15/upshot/how-jean-tiroles-work-helps-explain-the-internet-economy.html.

[26] Lina M. Khan, “Amazon’s Antitrust Paradox,” Yale Law Journal 126, no. 3 (2017).

[27] Khan, interview.

[28] Henry Calvert Simons, A Positive Program for Laissez Faire: Some Proposals for a Liberal Economic Policy (Chicago: University of Chicago Press, 1934).

[29] Max Read, interview by author, 2 November 2017.

[30] Elizabeth Warren, “Unsafe at Any Rate,” Democracy, no. 5 (2007): 8.

[31] Elizabeth Warren, “Reigniting Competition in the American Economy,” The Office of the Honorable Senator Elizabeth Warren, 29 June 2016, accessed 10 January 2018, https://www.warren.senate.gov/files/documents/2016-6-29_Warren_Antitrust_Speech.pdf.

[32] “Crack Down on Corporate Monopolies & the Abuse of Economic and Political Power,” A Better Deal, accessed 21 January 2018, https://abetterdeal.democraticleader.gov/crack-down-on-abuse-of-power/.

[33] Stoller, interview.

[34] David Shepardson, “21 states sue to keep net neutrality as Senate Democrats reach 50 votes,” Reuters, 16 January 2018, accessed 20 January 2018, https://www.reuters.com/article/us-usa-internet/21-states-sue-to-keep-net-neutrality-as-senate-democrats-reach-50-votes-idUSKBN1F52JO.

[35] “Rep. Ellison Introduces Merger Retrospective Act,” press release, The Office of the Honorable Representative Keith Ellison, 4 December 2017, accessed 20 January 2017, https://ellison.house.gov/media-center/press-releases/rep-ellison-introduces-merger-retrospective-act.

[36] Tony Romm, “Apple, Amazon, Facebook and Google spent nearly $50 million – a record – to influence the U.S. government in 2017,” Recode, 23 January 2018. https://www.recode.net/2018/1/23/16919424/apple-amazon-facebook-google-uber-trump-white-house-lobbying-immigration-russia.

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