Business Data Services: Crucial Link and Market Power Choke Point in the Digital Communications Network
77 Pages Posted: 1 Apr 2017
Date Written: March 31, 2017
Business Data Services (BDS) have been growing at almost 15% per year for a decade and a half, driven by the fact that high capacity, high quality, always on connections are vital to a wide range of businesses and economic activities. Affected services include not only communications – mobile, broadband and video – but all forms of high capacity connection for hospitals, ubiquitous networks like ATMs, and the evolving in the Internet of Things. The point at which the ocean of data coursing through the digital network becomes a stream directed to each individual consumer is the new chokepoint in the communications network.
This paper uses a traditional antitrust approach embedded in the structure-conduct-performance paradigm to describe the industrial organization of the digital communications sector. It argues that the inherent economic conditions in communications markets combined with a long period of lax antitrust enforcement and weak regulation to allow the emergence of a “Tight Oligopoly on Steroids” in which BDS plays a central role.
High concentration is a problem, but the problem is magnified by several other characteristics that are well recognized in the antitrust literature. The same four firms constitute the tight oligopoly across four communications product markets, meaning that the number of firms needed to engage in parallel and reciprocal conduct is very small. Their history prior to the Telecommunications Act of 1996 and their pattern of expansion since have resulted in geographic separation of home (fortress) territories, technological specialization, and product segmentation. This enables them to dampen rivalry.
The paper documents the severe and unique problem in the BDS market through three sets of data -- the evidentiary record compiled in the FCC’s decade long Special Access proceeding, the FCC’s reading of that data in a Final Rule and FNPRM, and a unique data set from New York that sheds light on the BDS market in the largest state served by Verizon that fills gaps in the record.
The data shows that the BDS market is not only one of the most concentrated markets in the entire digital communications sector (with CR4 values close to 100% and HHI indices in the range of 6000 to 7000), but also that it is rife with the abuse of market power. Analysis of price, cost and profit shows that market power is being exercised to yield excess prices that produce profits that are not merely “supranormal,” but persistent and astronomical. Analysis of contracting, bundling, and other qualitative conduct indicates that market power is being exercised along both horizontal and vertical dimensions. The paper concludes with a brief critique of the fundamental flaws in the recent FCC Flip-Flop order that sweeps 20 years of abuse under the rug and ensures the abuses will continue because it is based on the same theory of potential competition that has failed for the past two decades. The radical theory of potential competition adopted by the FCC bears a striking resemblance to an earlier discredited theory of hypothetical competition (perfect contestability) that did a great deal of policy harm before rigorous empirical analysis proved it was inapplicable to the real world. In this case, the FCC has the empirical record before it, but failed to read that record in a reasonable manner. The FCC’s declaration that it is "time for and new start," is correct, but this analysis shows that by ignoring the empirical record, disregarding well-established analytic models and violating legally mandated administrative procedures the FCC has headed in the wrong direction.
Keywords: Market Structure, Market Power
JEL Classification: A1
Suggested Citation: Suggested Citation