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FCC: Chronic Meddler

October 3, 1999

The FCC is a chronic meddler in the affairs of the communications industry. What Cervantes wrote could aptly be used to describe this agency and its supporters in that they have "an oar in every man’s boat and a finger in every pie."

The latest fingers are directed at MCI WorldCom and Sprint in their attempts to join together in what would be the largest merger in history. The $115 billion merger would bring together the second and third largest long-distance carriers. It is this last fact that has raised the ire of this the FCC and the usual band of mush headed thinking journalists.

In the wake of the announced merger, FCC Chairman William Kennard quickly dampened any enthusiasm for the merger by saying that it "appears to be a surrender" to competition and "the parties will bear a heavy burden to show how consumers would be better off."

Similar worry was exhibited by Bagehot’s shadow, The Economist, who weighed in with a piece with the subtitle "Why the MCI WorldCom takeover of Sprint merits close regulatory scrutiny."

None of the arguments presented were impressive or at all convincing and, in fact, represented mere regurgitation of many superficial observations we have heard countless times before. In essence, the article captured the laziness in reporting and the lack of any independent thought that we have come to expect from mainstream journalism.

Among the reasons cited for regulatory scrutiny was the "most obvious" reason that by allowing these two to join would hurt competition. The article recognized that the combined company would still trail AT&T in market share, but added that "the scope for tacit collusion between the big two may be worrying."

The Economist also expressed alarm at the alleged intent of American companies to create economies of scale and customer loyalty by offering to bundle at least four services--long-distance, Internet, local and wireless. The reason for concern is simply that this apparent trend would reduce the number of companies competing to offer these services. There is no effort to explain an opposing point of view other than a half-hearted reference that the telecom business is "changing so quickly."


On lessened competition

Critics of this merger who feel that it reduces competition because the number of competitors is lessened should take heart in knowing that there are over 400 companies selling long distance service according to the FCC’s own estimates.

As Thomas Weber noted in a Wall Street Journal article titled "Long Distance Rates Will Stay At Present Level, Analysts Believe," "there is plenty of competition…Companies such as Teleglobe Inc.’s Excel Communications unit and IDT Corp. offer aggressive pricing likely to keep MCI WorldCom and AT&T in check." Plenty of other entrants are soon to join the field as well. Bell Atlantic will start to offer long distance service in New York state early next year. Another green long distance company, Qwest Communications International, is joining forces with local provider US West. There seems to be plenty of evidence of meaningful choices in long distance providers.

More importantly, the number and size of companies in an industry provides no guide to the nature of the competition that will ensue. Regulators and other pro-interventionists that assume they have any idea what the "right number" and size of competitors in an industry should be are making an incredibly arrogant and ignorant assumption.

As Amos Bronson Alcott once wrote "to be ignorant of one’s ignorance is the malady of ignorance." Only the trial and error of the market can determine what industry structure will lead to the largest profits and concomitantly best serve the consumers.

As Murray Rothbard noted long ago, the optimal size of a firm in any given industry will depend on the demand of consumers and the opportunity costs of the factors of production in relation to other industries. These and other complex questions and factors will guide the entrepreneurs to produce in those industries where they will maximize their profits. By maximizing their profits they will in turn be employing their resources in the manner most preferred by consumers.

Moreover, these entrepreneurs will have every incentive to minimize their errors. Rothbard concluded, "any existing situation on the free market will tend to be the most desirable for the satisfaction of consumers’ demands (including herein the nonmonetary wishes of the producer)."

The problem is that we don’t have a free market in communications. In 1984, AT&T was broken up into the so-called Baby Bells. That this arrangement was inefficient is evidenced by the fact that after the Telecommunications Act of 1996 there is only one independent Baby Bell left. That is BellSouth, which was among the bidders for Sprint.

We have a host of antitrust laws that will inevitably impede the ability of the market to provide for consumers in the most efficient way. Regulators will continue to make ad hoc assumptions about what an industry should look like with nothing more to guide them than their anti-capitalistic prejudices.

As Dominick Armentano states in his Antitrust: The Case for Repeal, "the case for the antitrust laws is predicated on the mistaken assumption that regulators and the courts have access to information concerning social benefits, social costs, and efficiency that is simply unavailable in the absence of a spontaneous market process. Antitrust regulation is often a subtle form of industrial planning and is fully subject to the 'pretense of knowledge' criticism frequently advanced against government planning."

Instead the efficiency of certain industries will be heavily influenced by regulators looking at each transaction in isolation and either bestowing their blessing or not. Peter Huber, in a recent Wall Street Journal editorial, captured this idea when he stated that the regulatory approach we are witnessing represent "a stealth industrial policy, never really thought through, still less articulated, in which winners and losers are anointed through the selective granting of regulatory or antitrust indulgences."

On collusion & prices

Collusion of any kind between the Big Two could be of two kinds. They could either conspire to keep below what the free market price would otherwise have been in an attempt to drive out competitors, in which case consumers benefit with cheaper long distance charges. The Big Two would incur massive losses in the form of profit foregone while they wait for their 400 competitors to disappear. Assuming these competitors did all go bankrupt, who’s to say that when prices rise new competitors will not resurface?

This scenario is the so-called predatory pricing strategy that economists have long debated. The volumes of literature and research in this area are extensive. Such a strategy entails enormous risks and problems for the price cutters that are beyond the scope of this essay. A succinct, lucid and biting analysis of antitrust thinking is provided by Armentano.

The other way to collude would be for the Big Two to try to raise prices above what the market price would otherwise be. This would be an open invitation for their numerous competitors to rapidly expand their market share at the Big Two’s expense. Again, it does not seem to be a rational strategy and it is fraught with risks and problems of its own.

It is also important to recognize that there is more to long distance than the price. Obviously, there are a host of intangibles that we might broadly label under the umbrella service. Consumers may be willing to pay more for the convenience of having their long distance, local, Internet and wireless charges all on one bill. And this brings us to the charge that the Economist’s objection that we should be concerned about this trend toward bundling.

As Peter Huber noted, the effect of regulations on the telecom industry has not been a blessing for consumers, indeed the "most visible (and irritating) legacy is still apparent today: a fistful of separate bills every month and endless runarounds when things go wrong." The industry is changing to meet the demands of consumers. Therefore, the FCC would only be hindering the competitive process it supposedly so much wants to preserve.

On Liberty

Notwithstanding all the economic reasons that can be advanced in defense of this merger, I believe there is a much more important reason to not interfere with the market. It is seldom mentioned anymore in public policy debates of this kind, but the idea can best be summarized with one word: liberty.

Talking heads, the print media and hordes of policy analysts will undoubtedly spew forth all manner of data and analysis regarding this merger. Very few will defend the merger on the basis of freedom. Simply stated this merger and any others arising out of the market should be allowed to happen because it involves private parties who have willingly decided to merge. Assuming shareholders of both companies approve the merger according to their respective corporate charters, it would be a fundamental violation of their basic property rights to block it.

No American would tolerate a government telling him to whom he could sell his car and to whom he cannot. No American would tolerate a government telling him who he could sell his house to and who he could not. Likewise, this merger is no different in principle. This may be the most important reason for allowing this merger and any others the market produces.

Let us not repeat our mistakes by fighting the market forces that are rapidly shaping the telecom industry or any other industry for that matter. Heed the words of the poet William Wordsworth: "Let us learn from the past to profit by the present, and from the present to live better for the future."

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CHRIS MAYER is an MBA student at the University of Maryland.

To buy D.T. Armentano's book, click here.


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