Theories of Broadband Competition
Jeffrey A. Eisenach
American Enterprise Institute; NERA Economic Consulting
June 20, 2011
Like the other information technology (IT) markets that comprise the Internet ecosystem, markets for broadband communications services are characterized by rapid innovation, declining costs, product differentiation and the potential for competitive price discrimination, network effects, and “multi-sidedness.” Broadband ISPs make large, sunk cost investments and seek to differentiate their products in order to be able to earn economic returns on those investments. They seek to assemble and/or participate in systems that create new value for consumers, and do so by picking and choosing both the platforms in which they participate and the products with which they interconnect. They experience both supply-side economies of scale and scope and demand-side externalities that create powerful incentives to increase volumes by maximizing system openness, but, as with other IT firms, these incentives do not always outweigh the costs of interoperability.
This paper examines the competitive dynamics of broadband through the lens of the economic literature on competition in IT markets. It concludes that broadband markets are shaped by three sets of characteristics that distinguish competition in IT markets from competition in more traditional ones. Like other IT markets, broadband: (1) is characterized by high sunk costs, declining costs, and rapid innovation (dynamism); (2) functions as a complementary component in modular platforms (modularity); (3) is subject to demand-side economies of scope and scale (network effects). It is generally agreed that these characteristics have important implications for competition analysis, including increased focus on market dynamics and on “vertical” relationships among market participants, reduced emphasis on traditional structural presumptions, and the need to assess efficiency and competitive effects of various forms of conduct on a case-by-case basis.
One implication of this analysis is that the central metaphor used in the analysis of communications markets today – the notion that broadband networks are uniquely at the “core” of the Internet while content, applications and devices are at the “edge” – is at best misleading, and in any case does not justify differential policy treatment. To the contrary, for purposes of competition analysis, it is no longer possible to distinguish meaningfully between the competitive characteristics of broadband markets and other IT markets. Accordingly, there is no basis for asymmetric regulatory treatment – for ex ante regulation of broadband services and ex post antitrust scrutiny of other IT markets. The unavoidable conclusion is that competition oversight of broadband markets should be conformed to modern antitrust principles.
Number of Pages in PDF File: 73
Date posted: June 22, 2011