The Political Economy of Net Neutrality Regulation

Abstract On February 26, 2015, the Federal Communications Commission (FCC) proposed sweeping new regulation for broadband providers. While regulation is typically driven by a combination of economic and political considerations, this article argues that the FCC’s initiative is long on politics and short on economics. For example, the FCC is not able to identify a non-transitory abuse of market power by broadband providers to justify its actions. There is no evidence of excessive returns being earned by broadband providers and the violations of net neutrality that the Commission can point to, including throttling and blocking of data, are conspicuously few in number. What is more, the FCC has yet to establish that the regulatory oversight it proposes would not stifle more investment than it stimulates. Broadband is an example of a two-sided market in which edge (content) providers represent one side of the market and consumers represent the other side of the market. Just as newspapers impose positive prices on both advertisers and subscribers, it is (quite generally) efficient in two-sided markets for both sides of the market to contribute to the total price. Two-sided markets are characterized by a seesaw principle in which a lower price on one side of the market tends to give rise to a higher price on the other side of the market. Hence, a ban on paid prioritization of traffic delivery over broadband networks essentially requires consumers to pay the full freight. The FCC is therefore in the unenviable position of having to justify a policy to regulate broadband that is distinguished by being both economically inefficient and socially inequitable. While the courts are disposed to give deference to expert federal agencies under the Chevron Doctrine, the lack of economic foundation to justify broadband regulation promises to make this tough sledding for the FCC. The strategy on the part of the broadband providers will be to run out the clock with litigation in the hope that the political winds shift in their favor post 2016.