Monopolies and the Free Market

I was fortunate to have three of today’s smartest libertarian tech policy scholars respond to Thursday’s post about spectrum policy. I was particularly interested in Adam Thierer’s thoughtful response:

In this case, the net result of your advocacy for a Lockean Proviso for spectrum would be a newly empowered bureaucratic regulatory regime imposing a top-down, command-and-control vision on wireless markets. Somehow I don’t think that is consistent with the traditional “bottom-up” thinking at work on this blog!

Preemptive, “Mother-May-I?” regulation isn’t the way to go. For better or worse, antitrust law will probably be with us forever, and if things go disastrously wrong in this market, presumably antitrust officials will intervene. But isn’t it better to let the experiments continue and see what the natural evolution of the marketplace brings us? The burden of proof is on you to show why 5 unelected bureaucrats should micro-manage markets and resources.

What I find interesting about this passage is the tension between the first and second paragraphs. Adam says that “if things go disastrously wrong in this market, presumably antitrust officials will intervene.” This appears to be a grudging admission that if the wireless market gets too concentrated, then the government ought to use its powers under antitrust law to prevent or reverse consolidation.

But why should the government wait until we get all the way to “disastrously wrong” before doing anything? Once you’ve conceded the point that excessive concentration is bad for consumers, and that antitrust law is an appropriate remedy for this harm, it’s not clear what the rationale is for only acting after disaster has struck. Breaking up a merged company or preventing harms via conduct remedies are much more laborious, top-down processes than blocking a merger before it happens.

This has long been a tension in the libertarian approach to antitrust law. Some libertarians, such as Ayn Rand here (around 9:00) argue that monopolies never arise in a free market. Adam himself contributed to this body of thought with this paper arguing that the Bell monopoly was the product of government regulations rather than free markets. I think this argument appeals to many libertarians because if the claim is true, then we don’t need to wrestle with the hard question of what to do when monopolies arise.

But the more I think about this line of reasoning, the more it seems like a non-sequitur. We don’t live in an ideal free market, and monopolies clearly do happen in the actual economy we’ve got. Maybe libertarians are right and they’re the product of government interference in the free market. Maybe we’re wrong and some monopolies would occur even in a perfect free market. But I don’t think this matters if the question is what to do when a market becomes highly concentrated.

Like most libertarians, I suspect that a more liberal spectrum regime would produce more competition in the wireless industry rendering spectrum caps irrelevant. But if anything, this seems to me like an argument for, not against, blocking mergers that would take us farther from the outcome a true free market would produce. The federal government has a responsibility to clean up its own messes, as it did with the Ma Bell breakup in 1984, and it will hopefully do by blocking the AT&T/T-Mobile merger.

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11 Responses to Monopolies and the Free Market

  1. Don Marti says:

    “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” — Adam Smith

    (learning about business from Ayn Rand books is like learning about sex from Robert A. Heinlein books.)

  2. Brett says:

    Adam (and some of the other writers at TLF) don’t generally say that there are no private-sector monopolies. What they say is that there are no permanent private-sector monopolies without government regulation, as with Ma Bell. Look at what happened to IBM and Microsoft, both giants of their time who utterly dominated certain markets. Microsoft just had its anti-trust case wound down because it’s no longer relevant.

    He’d also point out that there’s a long history of unwarranted concern over mergers in this general area.

  3. Sean L. says:

    It worries me that there’s a belief that spectrum is somehow ‘different’ from any other property rights. The only difference is a matter of having the technology to divide it into small enough parts to be used by a large number of companies, or even individuals.

    We have had the technology to divide land into parcels small enough for individuals to purchase and use them for their own purposes for a while now. However, it’s only a matter of time where we can do that with spectrum. So long as the government controls where one company’s spectrum starts and another’s ends, the incentives to develop technology that could allow many thousands or millions of individuals to ‘own’ and use frequencies will be held back.

  4. dullgeek says:

    I have no opinion (yet) on the AT&T&T merger. However, my question for you, Tim, is this: if T-Mobile is financially weak enough to be purchased by AT&T, will a government that does not allow those two to merge further weaken T-Mobile? At what point does T-Mobile’s relative financial weakness allow their assets to be consumed by other market players? I can’t imagine the answer is “never”. So, if not that, when? And if there is some threshold beyond which T-Mobile’s relative weakness *can* result in merger with one of the other carriers, why is that threshold set lower than now?

  5. Brett says:

    I think it’s also important to recognize that it’s not just the US that has a concentrated number of providers due to the expensive nature of the business. Look at the chart in this post by Adam over at TLF on the number of mobile providers and market share. The average number is between 3-4 providers (with the UK having an exceptionally high 5), with the market share of the top two providers averaging 69.7%.

  6. dullgeek: If the merger goes through, T-Mobile will cease to exist as a distinct entity., so I’m not sure what you mean by “further weaken T-Mobile” in this context.

    If T-Mobile really can’t survive as an independent entity (which I doubt) then their spectrum should probably go to someone who hasn’t already hit the spectrum cap. Depending on how high the cap is set, that might be Sprint, MetroPCS, or some new entrant to the mobile market. Spectrum is a valuable resource, so someone will figure out how to make a profit with it.

  7. Jason Treit says:

    It worries me that there’s a belief that spectrum is somehow ‘different’ from any other property rights.

    Tim covered this in Market Extremism in Spectrum Policy. Property rights work best for things that are already scarce, rival, excludable, and bounded. Radio spectrum: yes (arguably), no, no, and no.

    From orbit, a visitor to earth could say there’s no difference between granting land rights by topographic plots or by altitude. Property = property. And from so high a level of abstraction, they’d be right. But the value of land originates on the ground. Behaviours that flow from the norms, incentives, and constraints of actual practice would wear the second regime down. An economy where everything in the realm of description gets a property title would sink under the weight of its transaction costs.

    Not to say present uses of spectrum are so dispositive: only that property is a small piece of a larger puzzle. Peter Van Valkenburgh points to a scenario in which “radio hardware manufacturers are forced to compete on the margin of each additional communication through the spectrum, rather than on an imaginary margin created by government granted bandwidth usage assignments”. Like Tim, I’m for concurrent experiments.

  8. dullgeek says:

    What I meant is if the merger does not go through will this make T-Mobile (which is already weak enough to be purchased) even weaker?

    But the answer to my question appears, in fact, to be “never” if the purchaser is AT&T or VZW (or those who are beyond the spectrum cap). Thanks for the response.

  9. Jason says:

    Just a technical note about your YouTube link – a time point can be specified by appending a tag to the end of the URL the following syntax: “#t=1m45s”

    So if you change the link in this post to http://www.youtube.com/watch?v=bx-LpRSbbeA#t=8m52s then you don’t have to tell people to manually skip to around the 9 minute mark. :)

  10. Adam Thierer says:

    Tim… My thinking on antitrust is very much shaped by the choice between ex ante vs. ex post regulation. How much faith should we place in sector-specific regulators to get things right through preemptive, prophylactic regulation versus allowing things to play out and then — on the rare occasions when intolerable monopolies over essential goods develop — letting antitrust regulators devise a remedy?

    More than any other economic value, I care about experimentation. I am completely under the sway of the Austrian School of thinking about markets and competition as an ongoing experiment, an evolutionary journey, a discovery process. How are we to know if intolerable monopolies over essential goods will actually develop unless we let things play out?

    As I argued in my critiques of the Lessig/Zittrain/Wu school of thinking, we need to be a bit more humble and have a little faith that ongoing experimentation and discovery will help us evolve into a better equilibrium. It’s during what some regard as a market’s darkest hour when some of the most exciting forms of disruptive technologies and innovation are developing. [I’ve elaborated more on this point in this lengthy discussion about Gary Reback’s recent book on antitrust.]

    Viewed in that light, opting for ex post antitrust regulation, therefore, is an easy choice compared to the misguided micro-management associated with preemptive regulatory strikes. The entire history of FCC common carriage regulation and “public interest” mandates teach us that. It also teaches how bureaucracies become hopeless entrenched, inefficient, and prone to capture.

    Now, having said all that, it must be noted that antitrust law itself is a form of economic regulation and has its own set of problems. And you’re correct to note that there “has long been a tension in the libertarian approach to antitrust law.” I can appreciate many of the arguments made by antitrust abolitionists. (There’s a certain madness to antitrust law best captured by R.W. Grant’s classic story, “Tom Smith and His Incredible Bread Machine.”) Nonetheless, it’s important to be realistic and acknowledge that antitrust likely isn’t going away and that perhaps it shouldn’t if it’s existence can help us avoid what I regard as the nightmare scenario I described above: preemptive, sectoral, technology-specific, command-and-control oriented regulation.

    Of course, some antitrust law can be preemptive without having all that baggage. And that’s essentially what I think you are endorsing here for AT&T – T-Mobile. You want the feds to “just say No” and be done with it. You’re assuming that’s sensible and efficient solution when I wouldn’t regard either of those things as a given. Again, I’d like to let experimentation continue and see how things turn out.

    I also do not understand your conclusion that “The federal government has a responsibility to clean up its own messes, as it did with the Ma Bell breakup in 1984, and it will hopefully do by blocking the AT&T/T-Mobile merger.” These two situations are completely unique. As I noted in that old history of how the original AT&T monopoly came about, there was nothing “natural” about it. It was government guided at almost every junction. Not so for the new AT&T. While we don’t have a perfectly free market in communications services today, AT&T competes more aggressively — and is generally more antagonistic toward government intervention — than it ever has been before. Moreover, having lived through the tail end of the old Bell System, I can remember the days of having to use a crappy rotary dial phone in just one color and being told to be happy about it. Today, by contrast, competition is robust and innovation is thriving. I’ve never used an AT&T phone and I don’t plan to because of the many excellent smartphone alternatives at my disposal.

    It’s a new world and one that keeps getting better regardless of who owns what. Have a little faith, my friend.

    But give me a call if things get bad. You have my Skype number after all!

  11. Ryan Radia says:

    Tim, if AT&T and Verizon Wireless were proposing to merge with each other, I’d find your essay above to be pretty compelling. But that’s not at all what’s happening; the level of market concentration in the wireless industry if and when AT&T and T-Mobile merge will still be fairly low compared to that of many modern capital-intensive markets (e.g. Web search, wireline broadband, CPUs, airliners, operating systems). To be sure, several of those markets are characterized by less government involvement than the wireless industry. And given the unique nature of spectrum as a crucial input in offering wireless service, it’s not unreasonable to argue that some sort of “spectrum cap” might make sense, at least until the federal government gets around to repurposing more spectrum to flexible market-based use.
    However, I don’t think we’re anywhere close to the level of spectrum concentration that would justify blocking the AT&T – T-Mobile deal. There are lots of smaller regional wireless operators with spectrum holdings that could be consolidated and used for nationwide mobile service. And several cable and satellite television companies have fairly valuable spectrum holdings that could be creatively combined to offer a service competing with major wireless players. Another strong indicator that we’re nowhere near a harmful level of concentration in the wireless sector is that performance-wise, it’s still a remarkably vibrant market. Companies are taking big risks, making huge investments, and trying to one-up the competition at every turn. It’s not at all like the cozy duopoly we (unfortunately) have in some local markets for wireline broadband.
    You argued in your June 2 post that market concentration and freedom tend to be inversely related. I think that’s a problematic oversimplification of how free markets actually operate. While it’s certainly possible that in some markets, an increase in market concentration might reduce consumer freedom, in most real-world situations the opposite is often the case. As a libertarian, I care deeply about consumers’ freedom to choose – but I don’t define that concept as simply the number of competing firms from which consumers may choose at a particular point in time. Rather, the freedom to choose depends on whether consumers’ capacity to choose is expanding in quality and quantity as time elapses. It isn’t merely about expanding variety among goods and services, but also about variety among markets themselves. Each time a new market emerges in response to demand, consumers’ freedom to choose expands. As Schumpeter explained, monopolistic behavior by firms is crucial to fueling destructive innovations.
    Consider the wireless market. In a narrow sense, consumers would be freer if they could select from a dozen nationwide providers (instead of the four that exist today). But what about the myriad ways in which consumers might well be less free if the wireless market were less concentrated? Anybody who’s studied the economics of the wireless industry in depth can attest to the importance of scale in enabling network expansion and build-out. Sure, we might see more vigorous price competition if the U.S. wireless market were characterized by lots of relatively small carriers, but consumers probably wouldn’t be able to freely choose to purchase an LTE smartphone – a choice they can make today thanks solely to America’s largest wireless network, Verizon Wireless! By making it possible for consumers to do more stuff with their phones, robust networks also fan the flames of the rapidly evolving market for ultra-powerful smartphones.
    Regarding libertarianism and antitrust, there are serious theoretical economic arguments for some amount of government antitrust oversight (albeit probably less of it than we have today). However, just as intellectual property laws that rest on fairly robust and widely accepted economic theory have in many ways actually hindered social welfare, antitrust enforcement in reality does a great deal of harm. Antitrust laws, as with copyrights and patents, encourage wealthy but sluggish firms to turn to government as a means of protecting their profitability and hampering rivals. Bureaucrats in the FTC and DOJ aren’t immune from the knowledge problem, and they face the same mismatched incentive structure that invariably inflicts government bureaucracies. With a handful of exceptions, “doing nothing” is not a good way for law enforcement officials to curry favor with the press, lawmakers, or with top administration officials. It’s also not a good way to earn bigger division budgets!

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