How much competition is necessary to replace regulation?

The quick answer is…it depends on the market.  Last week, the United States Court of Appeals, 8^th Circuit, upheld most of the FCC’s 2017 Business Data Services (BDS) Order in which the Commission established new criteria for determining market competitiveness for dedicated communication lines for businesses.  The net effect of the Order and it being upheld is that price cap regulation of BDS is eliminated in many of the country’s 3,233 counties.  In its decision, the Appeals Court stated that

“We recognize that the relevant data presents radically different pictures of the competitiveness of the market depending on the economic theory applied and the weight given to conflicting pieces of evidence.  But the FCC may rationally choose which evidence to believe among conflicting evidence in its proceedings, especially when predicting what will happen in the markets under its jurisdiction.  Thus, we deny the petitions for review as to the Competitive Market Test because the FCC’s resolution of competing evidence was not arbitrary and capricious.”

In its 2017 Order that came more than 10 years after a Notice of Proposed Rulemaking on the issue, the FCC argued that “the absence of entry in specific areas may be due to regulated prices inadvertently being set below competitive levels.  Such prices make entry unprofitable, are harmful to long run incentives to invest, can lead to inefficient short run levels of production and consumption, and can prevent entry indefinitely.”

Consequently, the Commission ordered that since competition for high bandwidth (> 45 mbps) services was robust now or expected over the medium term, price regulation was no longer necessary.   For lower bandwidth (< 45 mbps) services, it established a Competitive Market Test to determine if price cap regulation should be eliminated.  The Commission considered a geographical market, a county, competitive if 50% of the buildings within that county had a competitive provider with a network within half mile or if 75% of the census blocks within that county had cable broadband service. 

The FCC argued that nearby facilities restrained prices in the short term and could provide reasonable competition in three to five years.   While the Commission acknowledged that prices might rise after deregulation, they believed that entry would occur and drive prices down to competitive levels.  This is a BIG assumption in an industry that is characterized by high sunk costs (and risk) associated with entry.  The FCC believed, however, that, in this market, it only takes one competitor to enter to put significant downward pressure on prices.   Will that happen?  Time will tell, but let’s hope it does as competition is always preferred to regulation.  
FCC Order