Last month, the Federal Communications Commission announced (0) that it had begun reviewing the recent interconnection agreements that Netflix signed with Internet service providers Comcast and Verizon. The Commission’s growing interest in the heretofore unregulated interconnection market has prompted some commentators to renew their calls for all interconnection agreements to be filed with the Commission and made publicly available. Greater transparency, they argue, would provide consumers a better understanding of the economics of the Internet ecosystem beyond last-mile broadband networks, and would help the public police potential anticompetitive risks.
While transparency is often a laudatory goal, a mandatory public disclosure requirement in this case may ultimately harm the very competition that proponents seek to protect. This is the focus of my most recent Perspectives (1) article, published last week by the Free State Foundation. It notes that Supreme Court jurisprudence, antitrust authorities, and the Commission’s own precedent all warn that disclosing proprietary information about prices and costs can facilitate anticompetitive behavior by reducing the barriers to tacit coordination:
Price transparency facilitates collusion in two ways. First, the open communication of prices reduces the uncertainty of negotiating a supracompetitive price. Because overt communication about price collusion is prohibited by the Sherman Act, firms seeking to collude must overcome the difficulty of communicating indirectly to establish their target price. But as the Supreme Court explained in United States v. Container Corp., sharing current price data can solve this problem by signaling a target toward which others can move. In that case, suppliers of corrugated containers shared current price information upon request about the most recent price charged for a good. The Court noted that “[t]he exchange of price information seemed to have the effect of keeping prices within a fairly narrow ambit” because “[k]nowledge of a competitor’s price generally meant matching that price.” The result was a movement toward a stable, uniform price in violation of the Sherman Act.
Once firms have established a collusive price, transparency also helps enforce the collusive agreement. Here, as the Supreme Court has noted, “[u]ncertainty is the oligopoly’s greatest enemy,” because of the difficulty of identifying and punishing cheaters. But price transparency eliminates that uncertainty and therefore facilitates enforcement. Economists Frederic Scherer and David Ross explain: “If…every transaction is publicized immediately, all members of the industry will know when one has made a price cut, and each can retaliate on the next transaction. Knowledge that retaliation will be swift serves as a powerful deterrent to price cutting and therefore facilitates the maintenance of tacitly collusive prices.” Because market players know that any attempt at cheating will bring a swift response, they are less inclined to defect from the collusive price in the first place.
The article goes on to explain that even without attempts at tacit coordination, public disclosure can create upward pressure on prices simply because of market players’ unilateral actions.
As the Federal Trade Commission has explained, coordinated information sharing “can blunt a firm’s incentive to offer customers better deals by undercutting the extent to which such a move would win business away from rivals.” Market participants typically offer discounts in an attempt to gain market share away from rivals. But a company is less likely to offer such a discount if competitors can quickly learn the details of the agreement and move to match. Because it would be unlikely that discounting would gain share, firms would be less likely to engage in discounting in the first place. Transparency also decreases the incentives for companies to price goods aggressively. When a firm lacks knowledge about its competitor’s prices, it has incentives to offer low prices in an attempt to beat the “unknown” deal. But when rival pricing is no longer unknown, the incentive to outbid unknown price terms disappears.
The article discusses reasons why the structure of broadband markets may make them unusually susceptible to these risks. Even absent any actual anticompetitive effects, the increased antitrust scrutiny invited by price transparency will impose additional costs on the industry, which will ultimately be passed along to consumers in the form of higher prices. While critics may be correct that some players may possess market power in the interconnection market, the better solution is to allow antitrust law to investigate and, if necessary, punish specific anticompetitive practices, just as it does in most other sectors of the economy.
You can download the full article here (2), which makes these arguments in greater depth.