In an article called “Why Verizon and AT&T Are More Innovative Than ‘The Left’ Thinks,” Economist Jeff Eisenach makes some observations on his ascendancy to head the American Enterprise Institute (AEI) new Center For Internet, Communications and Technology Policy. Among these, Jeff says that I would attribute Comcast’s effort to block BitTorrent back in ’08 as motivated by a desire to leverage their broadband market power to protect video. “That’s the story Harold Feld would apply to Comcast and BitTorrent. I think it’s far-fetched to believe that Comcast thought BitTorrent was a competitive threat.”
Except, of course, I said exactly the opposite in this blog post back in 2008 when Comcast filed its full disclosure document with the FCC. What I actually said was: “it appears to me that Comcast did not block P2P for anticompetitive reasons.”
This did not, of course, make Comcast’s conduct acceptable. As I went on to explain:
“Rather than invest in upgrading its network, Comcast opted for the cheapest solution from its perspective without waiting for significant congestion to occur. It used the Sandvine equipment to block (“delay”) P2P transfers and (according to the Florida AG) targeted the top 1000 users per month, no matter what capacity these users actually consumed. This provided an effective means (from Comcast’s perspective) for managing potential congestion, even if it sucked rocks from a consumer perspective.”
While I like Jeff, this does not look like the sort of rigorous research one would hope for from a scholar of Jeff’s caliber and AEI generally – if they want to be taken seriously.
This brings me to my broader point. While I’m flattered that Jeff Eisenach regards me as the face of the ‘Left,’ and I enjoy the opportunity to tweak him over this, it highlights a broader problem among neo-conservative economists (or, as we might generalize, the ‘Right’). They have stopped listening to people who disagree with them. As a result, they keep saying the same thing over and over again – largely to each other and their Republican groupies.
I explore this a bit below . . . .
I do not think I flatter myself when I say a that even a casual reader of my blog would think that I have much broader and deeper concerns than marketpower – so that every exercise of regulation must rely on an exercise of marketpower. Start with this 2010 blog post reprinting my debate with Ray Gifford on the subject and concluding with my most recent rant on the network neutrality oral argument. I like to think, and I have about ten years worth of blogging to prove it, that while market power is not irrelevant, there are lots of other basis for why we care about something from a policy perspective.
Rather, as I’ve said repeatedly, real world economics is painfully complicated. Sometimes it’s pretty obvious that firms have anticompetitive incentives or clearly have market power. Sometimes their incentives still suck from a consumer welfare perspective regardless of marketpower. As I keep reminding people, George Akerloff’s The Market For Lemons is all about market failure in the presence of robust competition.
My current favorite example of this is rural call completion. As I’ve pointed out before, rural call completion comes from competitive providers all following their natural incentive to reduce cost. If it were up to the Department of Justice Antitrust Division or the Federal Trade Commission to solve this problem, they could do nothing about it because it’s not a market power problem. It’s not an unfair competition problem. If anything, the problem gets increasingly worse in a more competitive market, where least cost routers compete on the basis of cost to complete the call rather than on total calls completed.
Worse, not only does focus on market power not help us solve the problem, the focus on market power tells us we shouldn’t give a crap becuase, absent market power, a regulatory response is unwarraned. So some small percentage of the population don’t get calls – big deal. Most people get calls just fine, and most calls go through just fine. How can this problem of completing a small fraction of calls to a small segment of the population justify regulation of an entire market? They are not terribly interesting customers anyway, as evidenced by the failure of the free market to serve them. In the Neocon universe, they suffer the fate of the economically uninteresting – oblivion.
But there are more things in Heaven and Earth, Jeff Eisenach, then are dreamed of in neo-conservative economics. Among them, a fundamental principle that All Americans deserve basic phone service. Thus, even though market power is wholly absent from rural call completion, I would argue we must require carriers to track and complete calls.
Neocons Have Stopped Listening And Become Stagnant.
Jeff Eisenach is hardly alone in ignoring what I actually say and substituting a conversation with Imaginary Harold Feld in which the topic of conversation is market power. At this point, I can usually count on fairly predictable blather about absence of market power and how ‘the Left’ is finding monopoly where competition flourishes – regardless of what objections I may actually raise. But my amusement aside, why does this keep happening? What prompts Jeff Eisenach – who actually knows me – to imagine some sort of Imaginary Harold Feld obsessed with finding market power when a good deal of the time the question of market power has little bearing on the problem of consumer welfare?
From Neo-Conservatives to Neo-Confucians
I have sadly concluded that, by and large, Neocons (as neo-conservative economists are called) have become intellectually stagnant. It is not, as Paul Krugman keeps arguing, a ‘wonk gap’ in the Republican Party and among neo-conservative economists that has crippled the ability of the Right to handle complex problems of policy. Jeff Eisenach is certainly as smart and wonky as they come.
But Neocons simply stopped evaluating new situations on their facts. Content that they had found The Answer – only market power can justify regulation – they assume that all conversations about regulation must be about market power to even be worth having. Like Mandarins of 19th Century China neglecting such things as engineering in favor of Confucius and other traditional “correct” thought, Neocons and their Republican Mandarins in Washington’s Forbidden City have opted to ignore nearly every advance economics in the last 40 or so years.
Take Jeff’s comments (before his condemnation of Imaginary Harold Feld and his imaginary statements about market power) that he was totally for regulatory intervention in the late 1990s when Microsoft leveraged its dominant position so while such a thing could happen, it apparently hasn’t happened since. While I’m certainly glad that when a company gets (what was it, 95% marketshare) even Neocons may take notice, I cannot help but imagine that Jeff hasn’t seriously considered the possibility that market power might exist at any time since the Microsoft case ended. That’s a long time to contentedly contemplate that everything is working out for the best in this best of all possible worlds.
Neocons further compounded this intellectual malaise by surrounding themselves with adoring acolytes in the Republican Party and limiting their ‘serious conversation’ to the like-minded. After all, if you have all the answers, what could those who disagree with you possibly have to say. If market power is the only justification for regulation, then anyone advocating for regulators to act must be arguing that there is market power. Q.e.d. And since there isn’t market power, why bother to actually pay attention to what ‘the Left’ has to say?
For Eisenach and his Neoconfucian Neocons, it’s as if the entire behavioral economics school (for example) never existed. To suggest some grounds for a regulatory response other than market power makes you some sort of whack job from the dark ages.
Which I suppose makes Jeff’s substitution of Imaginary Harold Feld talking about market power rather than addressing what I actually write something of a compliment. Apparently, since Jeff does not regard me as a whack job from the middle ages, I must be talking about market power (which makes me not a whack job, but merely mistaken).
While kind, I’d much rather he actually listened. It might make for a more interesting conversation – and better policy.
Stay tuned . . .
I think you protest too much re: the market power point. I know you have many imaginative reasons for regulating the web, but pretending market power is not among them is — to be nice — “ahistoric.” For example, in 2010 you said this (in an FCC filing with your name on it):
“Solutions that depend solely upon market competition are also inadequate because of the market power exercised by dominant ISPs and the perverse incentives these incumbents have to discriminate against unaffiliated content and services, or to monetize scarcity as described below.”
See: http://apps.fcc.gov/ecfs/document/view?id=7020378850 at 24.
And, in 2007, you blamed BitTorrent specifically on market power in your FCC complaint against Comcast:
“Internet discrimination likely costs society billions in lost innovation in applications, lost consumer value in garnering the products and content of their choice, deadweight loss from network providers exerting or protecting market power(such as in the video programming market by blocking Internet video applications), and in stifling
deployment of and access to high-speed Internet service.”
See: http://www.publicknowledge.org/pdf/fp_pk_comcast_complaint.pdf at 30.
Perhaps you’ve since conceded error. Or perhaps that was the imaginary Harold 🙂
1/ (a) There is clearly a market power component to the rural call completion point. The rural ILECs have historically maintained a monopoly — fully supported by state and federal regulatory rules — and charged high access rates (including terminating access rates) as a result. As things have gotten really complicated in what used to be known as the “long distance” market, those forced to pay those monopoly rates are finding a way to avoid it. (That way depends on the complication and uncertainty as to whose fault it might be that the call didn’t go through. It is reminiscent, actually, of Yochai Benkler’s point in Wealth of Networks about long-term confidence in informal exchanges being reciprocated, somehow. You can’t formally cut off rural companies with insanely high access charges; you can only do it informally and seemingly inadvertently.) If I’m a Posnerian on this (that is, if I believe that market power is inherently transitory) rural call completion problems are a good thing. They are sending a signal to the rural companies that the gravy train is coming to an end.
(b) It’s all about who pays. Any given rural company could, if it wanted (and had the money), build at its own expense a fiber link from its switch to the nearest large company tandem, and then set access rates at $0.0007, or free, or whatever. In the real world most/many rural companies could not afford to build the fiber and could not afford to forgo all terminating access revenues. OK, fine. That just says that rural companies need subsidies to provide the service that all good progressives agree that rural folk should have. But there really is a market power component here — the terminating monopoly of the rural ILECs, traditionally sustained by regulatory rules.
2/ On the broader point, in discussing with conservatives, my favorite problem-to-which-market-power-is-not-the-solution is lawful surveillance. No functioning competitive market would lead to network providers building their networks in a way to make surveillance easy and efficient for law enforcement. Customers (even law-abiding customers!) don’t want to be surveilled and don’t want to pay for surveilling others. Since conservatives on the whole like law enforcement, this has a tendency to break their brains a bit. And once it is conceded that there are SOME things that we can impose by regulation that do not result from market failure, we get to a “now we’re just arguing about price” moment.
3/ Even more broadly, I think you are correct that a lot of neoconservative economic thinking seems not to have grasped things like behavioral economics, the social mechanisms by which (e.g.) commons-es function, etc. Here I think we have a classic case of resistance to acknowledging a broken paradigm. If you recall Kuhn (and who doesn’t…?), the need for a paradigm shift arises when enough anomalous observations accumulate that NEW PLAYERS IN THE FIELD see the anomalies as indicating a fundamental problem with the old paradigm, and create a new one The old guard basically hangs in until they retire or die, telling themselves that the old paradigm is just fine, sure it’s a little fuzzy around the edges, but everything is, and it’s the best we’ve got, and, besides, look at all the cool rigorous results we have, as compared to that vague and uncertain stuff the new guys are blathering on about. I wish that didn’t occur, and that even the old guard would be more supple in their thinking. But there you go.
You lost me at ‘neocon’.
I think we must be using “market power” in a different way. The fact that local rural LEC is a regulated monopoly is not really the issue — except in the political sense of getting high termination fees. Even then, high termination fees are merely the incentive for the behavior. Every firm wants to avoid higher costs, so they do. But it is not that Level 3 (to use as an example the firm that settled) has market power, therefore we regulate it to avoid exercise of that market power.
Indeed, the FCC has already arranged for the high ICC rates to zero out over time. it has not helped. Also, I would suggest that there is always incentive to use least cost routing (LCR). It has nothing to do with market power and everything to do with the incentive to reduce cost. That’s normally a good thing. But with interconnected VOIP, it potentially produces problems. Do we really believe that call completion problems would never arise again if only the high ICC charges were eliminated? Is it impossible to conceive any other set of circumstances under which LCRs would end up routing calls in ways that introduced significant latency? Or do we need some kind of rule that imposes responsibility for call completion with suitable enforcement power to align incentive with public policy?
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I agree with Paul. I really don’t care for neoconservatism, but it seems odd to discuss “neoconservative economics”. Back when neoconservatism was really “neo” there were a sizable number of political scientists and sociologists representing the tendency, but I believe Kristol made a point not to include any economists on the board of “Public Interest”. It happens to be the case that AEI is associated with neoconservatism and Jeff is an economist, but I don’t know if his perspective here is all that different from what you might find at Cato or Heritage.