Economists Say Network Neutrality Has Its Place, But Not Now

WASHINGTON, April 13, 2009 – Although a group of economists acknowledged that regulation of internet services could benefit consumers, they’ve concluded that their analyses of current market conditions shows that network neutrality regulations would be a tremendous impediment to the nation’s growth and prosperity.

The paper, filed by a group of scholars whose research has for many years applied economics to the telecommunications industry, told the Federal Communications Commission that current evidence "strongly suggests that the regulations, if adopted, would reduce consumer welfare in both the short and long run."

The comments were filed in dockets on both proposed network neutrality rules and the FCC's inquiry into broadband industry practices.

While the group made clear that regulation of the internet could benefit both consumers and network operators if enacted under the right market environment, such as one with a great economic imbalance, any evidence of a sufficient market failure does not support the case for preemptive regulation by the commission in this instance.

Further, the remedies offered by the commission in the proposed network neutrality regulations ban practices that the group finds to be "likely, in most circumstances, to be welfare enhancing." And while it’s possible to construct models where this would not be the case, said the group members, they could find "virtually no empirical evidence that such harm has occurred or is likely to occur in the future."

With respect to network neutrality, "it is extremely likely that the regulations proposed in the [notice of proposed rulemaking] would harm consumers and competition," the group said. And if "welfare-reducing conduct" occurs, the group said existing regulatory mechanisms are more than sufficient to deal with the problem on a case-by-case basis. "There is no need...for the commission to throw the welfare-enhancing baby out with the anticompetitive bathwater."

The theories of market power attributed to broadband providers in the network neutrality NPRM are the result of an inadequate economic analysis, the group told the commission. In fact, the NPRM only once "strongly implies" such market power but "never" concluded it exists, the group said.

The group finds this lack of analysis "difficult to understand" and troubling considering the NPRM is based upon an assumption of market power among broadband providers in need of preemptive regulation. "The issue of market power is central to any meaningful assessment of the impact of the proposed rules," the group said, and finding such power would be a necessary conclusion to successfully determine that regulation would benefit consumers.

Network neutrality supporters use of telephone-era regulations as an example of exercise of broadband providers market power is incorrect, the group said, as the broadband market is a "far cry" from the "statutory monopoly" held by AT&T when it operated the national phone network and was required to provide service to every home in the country. The expansion of wireless broadband services means most regions of the United States "do not appear to be natural monopolies for broadband service," the group said, quoting comments filed by the U.S. Department of Justice.