Competition, Regulation Competition, Regulation and Communications and Communications

Policy in the Digital Era Policy in the Digital Era

Howard A. Shelanski, Howard A. Shelanski, U.C. BerkeleyU.C. Berkeley

Centre for Competition PolicyCentre for Competition Policy

University of East AngliaUniversity of East Anglia

July 7-8, 2008July 7-8, 2008

AbstractAbstract Changes in telecommunications markets over the Changes in telecommunications markets over the

past decade have undermined the economic past decade have undermined the economic rationale for conventional monopoly regulation rationale for conventional monopoly regulation while raising hard questions about the transition while raising hard questions about the transition from from ex anteex ante sector-specific regulation to the sector-specific regulation to the more more ex postex post approach of general competition approach of general competition law. This presentation will show data on changes law. This presentation will show data on changes to the U.S. telecommunications market and will to the U.S. telecommunications market and will discuss implications of those changes for the discuss implications of those changes for the balance between antitrust and regulation. It will balance between antitrust and regulation. It will then examine how U.S. antitrust law mediates the then examine how U.S. antitrust law mediates the boundary between regulation and general boundary between regulation and general competition law after the U.S. Supreme Court’s competition law after the U.S. Supreme Court’s 2004 2004 TrinkoTrinko decision. decision.

Transformation of the U.S. Transformation of the U.S. Telecoms Market, 1996 to TodayTelecoms Market, 1996 to Today

In 1996, the U.S. had 38 million wireless In 1996, the U.S. had 38 million wireless subscribers; in 2007 it had over 200 subscribers; in 2007 it had over 200 million.million.

In 1996, incumbent local exchange In 1996, incumbent local exchange carriers (ILECs) served over 180 million carriers (ILECs) served over 180 million lines. By 2005 that figure was below 140 lines. By 2005 that figure was below 140 million lines. million lines.

In 1996 only about 1 in 5 U.S. households In 1996 only about 1 in 5 U.S. households had internet access. Today, nearly 4 in 5 had internet access. Today, nearly 4 in 5 have internet access. have internet access.

New versus Old TechnologiesNew versus Old Technologies

Wireless and internet-based communicationsWireless and internet-based communications

Complements and, increasingly, sComplements and, increasingly, substitutesubstitutes for for conventional serviceconventional service

In 1996, Americans placed 504 billion conventional local In 1996, Americans placed 504 billion conventional local telephone calls and made an average of 143 minutes of telephone calls and made an average of 143 minutes of long-distance calls per month.long-distance calls per month.

In 2005, Americans placed 336 billion conventional local In 2005, Americans placed 336 billion conventional local telephone calls and made an average of only 51 minutes telephone calls and made an average of only 51 minutes per month of long-distance calls.per month of long-distance calls.

Where did the calls go?Where did the calls go? In 1996, the 38 million U.S. wireless customers In 1996, the 38 million U.S. wireless customers

used an average of 125 minutes per month => used an average of 125 minutes per month => Today, the over 200 million subscribers use an Today, the over 200 million subscribers use an average of over 800 minutes per month. average of over 800 minutes per month.

In 1996, fewer than than 20 million U.S. In 1996, fewer than than 20 million U.S. households even had internet access => By households even had internet access => By 2005, the three leading instant messaging 2005, the three leading instant messaging services had 100 million distinct monthly users. services had 100 million distinct monthly users.

So, calls went from conventional telephony to So, calls went from conventional telephony to wireless and internet-based alternatives.wireless and internet-based alternatives.

Regulatory ImplicationsRegulatory Implications

Monopoly assumptions Monopoly assumptions are less warrantedare less warranted

A prioriA priori rules are less rules are less applicableapplicable

Regulatory ImplicationsRegulatory Implications

Because regulatory benefits Because regulatory benefits decline as competition decline as competition increases, we need to increases, we need to reconsider:reconsider: Retail price regulation, Retail price regulation, Line-of-business limitations, and Line-of-business limitations, and Obligations to provide network Obligations to provide network

facilities to competitorsfacilities to competitors

Regulatory implicationsRegulatory implications

Costs of regulation Costs of regulation increase with competitionincrease with competition In the presence of competition, In the presence of competition,

regulation may fail to send correct regulation may fail to send correct economic signals and economic signals and

Regulation may “divert scarce Regulation may “divert scarce resources from carriers that would resources from carriers that would otherwise use those resources to otherwise use those resources to compete in local markets.” (FCC)compete in local markets.” (FCC)

Regulatory implicationsRegulatory implications

Monopoly gives regulators a Monopoly gives regulators a margin for error: margin for error: regulation can be imprecise and still be regulation can be imprecise and still be

beneficialbeneficial

Under competition, regulators Under competition, regulators have much less margin for errorhave much less margin for error Prices that are too high or too low both Prices that are too high or too low both

have potential anticompetitive have potential anticompetitive consequences.consequences.

The Market Calls For A New ApproachThe Market Calls For A New Approach The new competition is not perfect, but in The new competition is not perfect, but in

network industries with high fixed costs, network industries with high fixed costs, even partial substitution can provide more even partial substitution can provide more effective competitive discipline than in effective competitive discipline than in other markets. Revenues fall faster than other markets. Revenues fall faster than costs as customers leave, so even small costs as customers leave, so even small losses in market share hurt.losses in market share hurt.

Even in concentrated and imperfectly Even in concentrated and imperfectly competitive telecom markets, incumbents competitive telecom markets, incumbents can lose market power; this provides good can lose market power; this provides good cause to reconsider the conventional, cause to reconsider the conventional, a a prioripriori approach to regulation. approach to regulation.

New approachNew approach

The new competition does not imply The new competition does not imply complete regulatory “laissez-faire.”complete regulatory “laissez-faire.”

It does imply that, with some exceptions, It does imply that, with some exceptions, regulation through punishment of anti-regulation through punishment of anti-competitive behavior competitive behavior ex post,ex post, on a case- on a case-by-case basis, would be more likely to by-case basis, would be more likely to create benefits and less likely to distort create benefits and less likely to distort competition than conventional competition than conventional a priori a priori conduct rules. conduct rules.

Hard QuestionsHard Questions

When should basic interconnection among When should basic interconnection among competing networks for the exchange of traffic competing networks for the exchange of traffic be mandated and when left to the market?be mandated and when left to the market? Even if most regulation yields to general Even if most regulation yields to general

competition law, there is a good case for keeping competition law, there is a good case for keeping mandatory interconnection among rival networksmandatory interconnection among rival networks

What other anti-discrimination measures might What other anti-discrimination measures might still be warranted as the telecommunications still be warranted as the telecommunications market becomes more competitive?market becomes more competitive?

Hard QuestionsHard Questions

To what extent is antitrust law To what extent is antitrust law adequate for such adequate for such ex postex post enforcement?enforcement? Is the essential facilities doctrine in the Is the essential facilities doctrine in the

EU a strong enough tool for such a shift EU a strong enough tool for such a shift in Europe?in Europe?

In the U.S., is sector specific competition In the U.S., is sector specific competition policy needed to get around U.S. policy needed to get around U.S. antitrust law’s right to refuse to deal antitrust law’s right to refuse to deal (see (see VerizonVerizon v. v. TrinkoTrinko)?)?

Trinko, Trinko, Essential Facilities, and Essential Facilities, and Antitrust in Regulated IndustriesAntitrust in Regulated Industries

TrinkoTrinko can be interpreted in a number of can be interpreted in a number of ways, depending on whether one reads ways, depending on whether one reads the case narrowly or broadly.the case narrowly or broadly.

I will discuss 3 possible readings and their I will discuss 3 possible readings and their implications:implications: TrinkoTrinko as barrier to expansion of antitrust law as barrier to expansion of antitrust law

by regulatory statutesby regulatory statutes TrinkoTrinko as presumption against “strong” as presumption against “strong”

application of antitrust in regulated industriesapplication of antitrust in regulated industries Trinko Trinko asas presumption against any antitrust presumption against any antitrust

enforcement in regulated industriesenforcement in regulated industries

Trinko Trinko as Barrier to Regulatory as Barrier to Regulatory Expansion of Antitrust LawExpansion of Antitrust Law

A narrow reading of A narrow reading of TrinkoTrinko is that regulatory is that regulatory statutes cannot, without express provision by statutes cannot, without express provision by Congress, broaden the scope of conduct for Congress, broaden the scope of conduct for which antitrust imposes liability. which antitrust imposes liability. U.S. antitrust law imposes no duty to deal with U.S. antitrust law imposes no duty to deal with

competitors except as in competitors except as in AspenAspen, so plaintiff, stating , so plaintiff, stating no no AspenAspen claim, cannot use the 1996 telecom Act’s claim, cannot use the 1996 telecom Act’s duties to deal as grounds for liability against duties to deal as grounds for liability against defendant under Section 2 of the Sherman Act.defendant under Section 2 of the Sherman Act.

This seems perfectly sound. Congress should This seems perfectly sound. Congress should not be deemed in one statute to unwittingly or not be deemed in one statute to unwittingly or implicitly alter the scope of other statutes.implicitly alter the scope of other statutes.

Cont’dCont’d

But, this narrow reading is hard to But, this narrow reading is hard to square with other parts of the Court’s square with other parts of the Court’s opinion.opinion. The Court goes on to say more about The Court goes on to say more about

the way that antitrust should apply in the way that antitrust should apply in regulated industries.regulated industries.

TrinkoTrinko as Limiting “Strong” Antitrust as Limiting “Strong” Antitrust Enforcement in Regulated IndustriesEnforcement in Regulated Industries

The Court notes that antitrust must consider the The Court notes that antitrust must consider the particular circumstances of an industry, and states particular circumstances of an industry, and states that regulation is an important factor in that that regulation is an important factor in that consideration.consideration.

This could mean only that courts should be especially This could mean only that courts should be especially wary of “undue expansion” of liability where there is wary of “undue expansion” of liability where there is regulation that affects competition in an industry. regulation that affects competition in an industry.

So interpreted, the Court is saying that regulated So interpreted, the Court is saying that regulated industries are not the place to add to the scope of industries are not the place to add to the scope of conduct for which antitrust will impose liability. conduct for which antitrust will impose liability. So in this case, regulation means that there should be a So in this case, regulation means that there should be a

presumption against presumption against addingadding to the “few existing exceptions to the “few existing exceptions from the proposition that there is no duty to aid from the proposition that there is no duty to aid competitors.” competitors.”

Cont’dCont’d This interpretation limits the use of cases in This interpretation limits the use of cases in

regulated industries to move antitrust in a regulated industries to move antitrust in a particular pro-enforcement direction; particular pro-enforcement direction; i.e.i.e. as as settings for “strong” antitrust enforcement that settings for “strong” antitrust enforcement that goes beyond the established scope of liability goes beyond the established scope of liability existing at the time of the case.existing at the time of the case.

The implication, however, would be that courts can The implication, however, would be that courts can still apply antitrust to its full, pre-existing extent.still apply antitrust to its full, pre-existing extent. This would mean in this case that, had antitrust law This would mean in this case that, had antitrust law

already recognized broader duties to deal with rivals, already recognized broader duties to deal with rivals, courts should recognize those duties even if plaintiff’s courts should recognize those duties even if plaintiff’s claim were “at or near the outer boundary” of liability. Just claim were “at or near the outer boundary” of liability. Just as regulation shouldn’t add to antitrust law, it shouldn’t as regulation shouldn’t add to antitrust law, it shouldn’t contract it either. This is consistent with the text of the contract it either. This is consistent with the text of the 1996 Act’s antitrust savings clause.1996 Act’s antitrust savings clause.

TrinkoTrinko as Strongly Limiting Antitrust as Strongly Limiting Antitrust Enforcement in Regulated IndustriesEnforcement in Regulated Industries

Under this interpretation, Under this interpretation, TrinkoTrinko imposes a general presumption that imposes a general presumption that courts should be particularly modest courts should be particularly modest in their application of antitrust law in in their application of antitrust law in regulated industries. regulated industries. Not only should courts refrain from Not only should courts refrain from

adding to antitrust liability, but they adding to antitrust liability, but they should presume against separate should presume against separate antitrust liability in regulated industries.antitrust liability in regulated industries.

Cont’dCont’d

The implication is that antitrust plaintiffs The implication is that antitrust plaintiffs should know going into a case involving a should know going into a case involving a regulated industry that their burden will be regulated industry that their burden will be especially high.especially high. The Court’s discussion of the costs of section 2 The Court’s discussion of the costs of section 2

enforcement suggests that, in rule-of-reason enforcement suggests that, in rule-of-reason balancing, the fact of regulation should lead balancing, the fact of regulation should lead courts to emphasize the costs and discount the courts to emphasize the costs and discount the marginal benefits of antitrust enforcement, thus marginal benefits of antitrust enforcement, thus potentially leading to a decision against liability potentially leading to a decision against liability for the same conduct that might have led to for the same conduct that might have led to liability in a non-regulated context.liability in a non-regulated context.

Which Interpretation is Right?Which Interpretation is Right?

The narrowest interpretation, The narrowest interpretation, TrinkoTrinko as barrier to as barrier to regulatory expansion of antitrust law, is a key part of regulatory expansion of antitrust law, is a key part of the story but the opinion clearly goes further.the story but the opinion clearly goes further.

The choice is really between interpretations 2 and 3: The choice is really between interpretations 2 and 3: TrinkoTrinko as barrier to strong antitrust claims, or as as barrier to strong antitrust claims, or as strong barrier to any antitrust claims, in regulated strong barrier to any antitrust claims, in regulated industries. industries.

The opinion is ambiguous, but to my reading tilts The opinion is ambiguous, but to my reading tilts toward the broader interpretation: in the regulated toward the broader interpretation: in the regulated industry context, courts should presume not only industry context, courts should presume not only against extending the scope of antitrust liability, but against extending the scope of antitrust liability, but against applying antitrust as already clearly against applying antitrust as already clearly established because of the cost/benefit balance of established because of the cost/benefit balance of section 2 enforcement.section 2 enforcement.

Implications for Antitrust Implications for Antitrust Enforcement GenerallyEnforcement Generally

Rule-of-reason cases usually focus more on the costs and Rule-of-reason cases usually focus more on the costs and benefits of the benefits of the conductconduct at issue than those of at issue than those of enforcementenforcement. . TrinkoTrinko moves enforcement costs to center stage, at least in moves enforcement costs to center stage, at least in regulated industries.regulated industries. But the Court says nothing about the costs of regulation. Why should But the Court says nothing about the costs of regulation. Why should

antitrust’s costs cause it to retreat in regulated industries, without antitrust’s costs cause it to retreat in regulated industries, without balancing the costs of antitrust against the costs of regulation?balancing the costs of antitrust against the costs of regulation?

The Court is more expressly and generally concerned with the The Court is more expressly and generally concerned with the costs of antitrust than in past cases; see its discussion of false costs of antitrust than in past cases; see its discussion of false positives.positives. While antitrust cases have long cautioned against barring conduct we While antitrust cases have long cautioned against barring conduct we

don’t understand, don’t understand, TrinkoTrinko moves in a more expressly skeptical moves in a more expressly skeptical direction.direction.

Opinions may differ on whether these observations are accurate Opinions may differ on whether these observations are accurate or reveal good or bad developments. A topic for future or reveal good or bad developments. A topic for future discussion.discussion.

TrinkoTrinko and Antitrust in Regulated and Antitrust in Regulated Industries: Open QuestionsIndustries: Open Questions

When is an industry sufficiently When is an industry sufficiently regulated to trigger regulated to trigger TrinkoTrinko’s ’s presumption against antitrust presumption against antitrust enforcement?enforcement? The Court cites precedent involving The Court cites precedent involving

“pervasive” regulation“pervasive” regulation But the Court also refers more generally But the Court also refers more generally

to the mere existence of regulation as to the mere existence of regulation as relevantrelevant

Cont’dCont’d

A fair reading of the opinion suggests A fair reading of the opinion suggests the Court’s presumption should apply the Court’s presumption should apply only when a particular kind of regulation only when a particular kind of regulation exists:exists:

““One factor of particular importance is the One factor of particular importance is the existence of a regulatory structure designed existence of a regulatory structure designed to deter and remedy anticompetitive harm.”to deter and remedy anticompetitive harm.”

There must be something “built into the There must be something “built into the regulatory scheme which performs the regulatory scheme which performs the antitrust function” (quoting antitrust function” (quoting SilverSilver).).

Open questions, cont’dOpen questions, cont’d

Does the competition-focused regulation Does the competition-focused regulation have to be actively enforced, or is its mere have to be actively enforced, or is its mere existence on the books sufficient?existence on the books sufficient? This is a key question, perhaps the key This is a key question, perhaps the key

question, after question, after TrinkoTrinko. If a presumption against . If a presumption against antitrust can apply absent active enforcement antitrust can apply absent active enforcement of a regulatory statute that ostensibly of a regulatory statute that ostensibly “performs the antitrust function,” then a little “performs the antitrust function,” then a little regulation could be a dangerous thing for regulation could be a dangerous thing for competition enforcement in regulated competition enforcement in regulated industries.industries.

Open questions, cont’dOpen questions, cont’d The opinion suggests that the Court found it The opinion suggests that the Court found it

relevant that the FCC was actively enforcing the relevant that the FCC was actively enforcing the statute, citing examples of the FCC’s section 271 statute, citing examples of the FCC’s section 271 proceedings and enforcement of ILEC unbundling proceedings and enforcement of ILEC unbundling obligations. obligations.

But the Court also talks about the statute’s pro-But the Court also talks about the statute’s pro-competition provisions as being “enforcecompetition provisions as being “enforceableable” as ” as opposed to actually “enforcopposed to actually “enforceded”, so there may be an open ”, so there may be an open question here.question here.

Moreover, suppose an agency does not issue regulations Moreover, suppose an agency does not issue regulations to implement a competition-focused statute. Should to implement a competition-focused statute. Should TrinkoTrinko’s presumption still apply or should some reasoned ’s presumption still apply or should some reasoned agency decision (either to regulate or not) be required?agency decision (either to regulate or not) be required?

Implications for Antitrust in Implications for Antitrust in Regulated IndustriesRegulated Industries

My interpretation of My interpretation of TrinkoTrinko so far is that so far is that it creates a presumption against it creates a presumption against antitrust enforcement in regulated antitrust enforcement in regulated industries, even for conduct that would industries, even for conduct that would trigger liability in the non-regulated trigger liability in the non-regulated context, where:context, where: the regulatory statute addresses the the regulatory statute addresses the

competition concerns of antitrust, and,competition concerns of antitrust, and, the statute provides for continuing oversight the statute provides for continuing oversight

and enforceability by the authorizing agency.and enforceability by the authorizing agency.

Implications, cont’dImplications, cont’d The implications for actual cases will depend on The implications for actual cases will depend on

how broadly courts choose to enforce the how broadly courts choose to enforce the presumption under these conditions. Should presumption under these conditions. Should TrinkoTrinko apply: apply: Where the statute merely authorizes, but does not Where the statute merely authorizes, but does not

mandate, competition enforcement?mandate, competition enforcement? Where the agency is passive in exercising its authority?Where the agency is passive in exercising its authority? Where the statute establishes competition standards or Where the statute establishes competition standards or

requirements that are weaker than those of antitrust?requirements that are weaker than those of antitrust?

The Court is silent on the above questions, The Court is silent on the above questions, leaving a zone of discretion for lower courts.leaving a zone of discretion for lower courts. Credit Suisse Credit Suisse (2007) suggests the Supreme Court will (2007) suggests the Supreme Court will

take a broad view of the preclusive effects of regulatory take a broad view of the preclusive effects of regulatory statutes on antitrust. statutes on antitrust.

Implications, cont’dImplications, cont’d

The case raises some risk that merely The case raises some risk that merely nominal regulation could displace antitrust nominal regulation could displace antitrust enforcement in regulated industries, but enforcement in regulated industries, but some language in opinion hints otherwise.some language in opinion hints otherwise.

Whether a little regulation could be a Whether a little regulation could be a dangerous thing for antitrust will depend on dangerous thing for antitrust will depend on lower court interpretations of lower court interpretations of TrinkoTrinko and and related cases like related cases like Credit SuisseCredit Suisse. Congress, . Congress, courts, and agencies should pay attention to courts, and agencies should pay attention to ensure a good balance between antitrust ensure a good balance between antitrust and regulation.and regulation.

ConclusionsConclusions The U.S. telecommunications market has become The U.S. telecommunications market has become

remarkably more competitive since 1996.remarkably more competitive since 1996.

This transformation undermines the rationale for This transformation undermines the rationale for conventional telecom regulation through conventional telecom regulation through a priori a priori rules, and weighs in favor of regulation through rules, and weighs in favor of regulation through ex postex post competition enforcement. competition enforcement.

Hard questions remain about the scope of Hard questions remain about the scope of remaining regulation, about the need for sector-remaining regulation, about the need for sector-specific competition rules to supplement general specific competition rules to supplement general antitrust law, and about when antitrust law will antitrust law, and about when antitrust law will apply in the presence of such regulation. apply in the presence of such regulation.