The Battle of the Broadbands

Two days ago, the FCC and broadband providers were challenged by President Obama’s petition for net-neutrality, that is, that all traffic on the Internet should be treated equally. For several years, the FCC has been increasing regulatory policies on Web traffic, benefitting Internet service providers (ISPs) by allowing them to charge for the use of “fast lanes” and discriminate against small content producers that cannot afford the pay. However, Obama believes that the Internet should be treated as a public utility, giving equal access to everyone and eliminating the power of ISPs as gatekeepers.

The battle is between two powerful industries: broadband providers on one side, such as Comcast, Time Warner, Verizon and AT&T Inc., and web giants (Google, Facebook, and Amazon) and smaller tech companies (Etsy, Tumblr, Kickstarter) on the other. Upholding Stigler’s argument, the regulation is being sought out by the latter industry. However, whether Obama’s petition will pass or not will require analyzing Olson’s pressure factor. Up until now, only broadband providers have expressed their strong opposition to net neutrality, some even have threatened to challenge it legally if passed. Because the broadband industry is composed of a selective number of providers, they are more likely to organize an exert pressure on opposition. The industry of web giants and smaller businesses, on the other hand, is composed of more actors and hence will have more trouble organizing, some will opt to free ride. For instance, Google, Facebook and Amazon have yet remained silent and showed little support for smaller companies like Etsy and Kickstarter. If they overcome organization problems and determine selective incentives, resulting in more pressure, then victory could tilt towards net-neutrality… Lean back, because the battle has just started.

Airline Regulations eased or new ones added?

          This CNN article describes major airline reactions to the latest change to Airline regulations  electronic devices are now allowed during all parts of a flight.  The only hitch is that you have to get each aircraft approved by the FAA to be able to do this.  US Air and Southwest will be among the first to  receive approval (They are also among the largest airlines in the US).  Spirit Airlines (a smaller airline) on the other hand did not give a time table of when their aircraft will be approved.
          While this may seem like deregulation, this could be another example of rent seeking by the large players in the airline industry.  The cost of filing the additional paperwork to get the luxury of allowing electronics at all times on aircraft is more easily covered by the incumbents in the industry with larger market shares and deeper pockets.  At first glance, this appears to benefit passengers, but the new regulations could concentrate the market even further raising both profits for larger airlines and prices for their passengers.

Uber Unfair Regulation

I'm glad that this course has given me a much better understanding of government regulation, but real-world examples still make me sad sometimes.

Uber is an awesome startup from San Francisco whose premise is immediately attractive. They designed a great iPhone app that you download. You open the app, hit a button, and within minutes a car comes to pick you up. It takes you to your destination, and you just get out -- the app already has your payment info, so they can charge you automatically. They have also created an awesome backend and give iPhones to black car drivers who can pick you up. Their algorithms for sending people to the right places are remarkably better than what most Limo companies currently use, and so through their use of technology they make people much better off.

But, as this NYT article discusses, regulators have been fighting back against Uber. They've been forced to shut down certain operations in some cities, and may soon be made to close entirely. Of course, excuses are always made:

Services like Uber, Airbnb andCraigslist can cut out the middleman and lead to more efficient markets. But regulators say they could also put consumers at risk.

One example they cite of "harming consumers" is particularly interesting to an economist. Regulators cite how for busy nights like New Years Eve or in the aftermath of Hurricane Sandy, Uber was "price-gouging" by raising their prices quite a bit. It's obvious from a moment of thinking about it that this is an efficient and good thing: by raising their prices, they prevent themselves from facing a shortage and inability to provide cars to those that ask, and instead allocate them to those who value them the most and are willing to pay, rather than just a random selection of first-come, first-served. Regulators though prey on the general public's misunderstanding of such phenomenon cast Uber as an evil, greedy organization that threatens to upset the important infrastructure of ride-for-hire transportation.

I'm hoping Uber comes out on top, but with Taxi services so entrenched and regulators so thoroughly captured by monopolistic companies, I'm not necessarily hopeful.

Update: Today, however, a major victory for Uber in Washington DC. So it's not always bad! Sometimes the good guys lobby well enough to win!

Acquiring Liquor Regulation

Last semester, in Professor Larson's Auction Theory class, we studied Washington State's auction of their liquor stores as part of our final exam, and the story had lots of public choice implications.

Washington used to have a state monopoly for liquor sales (why this would have been the case in the first place is an interesting topic for public choice study, but I won't get into that here). As has been the case in many states, there was a movement to upend the public monopoly and allow for private sales. What many people don't realize, however, is that these efforts have been largely spearheaded by big-box retailers, namely Costco and Target. Their lobbying efforts meant that when the voter referendum to disband the state monopoly was finally on the ballot, it created a new regulation: the state would no longer be involved in liquor sales, but from that point forward only stores greater than 10,000 square feet in size would be allowed to sell liquor.

When I learned about it, this blew my mind: this regulation seems so obviously detrimental to public welfare and so clearly designed only to serve the interests of the lobbyists that it was honestly surprising to me. It hides behind the veil of

public concerns that gas stations and mini-marts would be allowed to sell liquor, 

but more realistically seems directed at preventing competition from smaller entrants. Perhaps I shouldn't have been surprising - Stigler's analysis of how firms acquire regulation to keep out new competition and support themselves appears to fit this situation perfectly.



(Note: Also of interest, though not necessarily as closely related to public choice, is the auction process that went on in this case. The existing state stores were auctioned off to public buyers, and they were granted special exemptions to the 10,000 square foot rule and allowed to continue operation.)

Don't Tread on Me Anymore

Costco, a membership warehouse chain known for its large discounts on a variety of items, also happens to be one of the largest retailers of wine in the world. However, due to alcohol regulation laws imposed by a majority of states, retailers of alcohol (like Costco) cannot buy directly from the manufacturer, but must instead purchase through a distributor. This causes the price of alcoholic beverages to be kept artificially high, that is to say not the price an unregulated market would supply. The two articles presented here describe Costco’s desire and ongoing efforts to deregulate the wine industry by cutting out the middle man (the distributor) and buying straight from the manufacturers (the wineries). If Costco is successful, it will be able to reduce the cost of the wine it’s selling substantially, thereby increasing quantity sold and profit made.

These articles reference a number of points that we have hit in class. First of all, there is a substantial amount of rent-seeking money involved in trying to influence alcohol distribution laws. Costco alone has spent over $500,000 dollars trying to change the law, while on the other side The Wine and Spirits Wholesalers of America have spent millions to keep the present laws in place. While it will undoubtedly by worth the winners’ efforts (in many billions of dollars for one industry or another), the loser will have wasted resources which could have been used elsewhere resulting in a dead weight loss to society.

Secondly, and more importantly to recent class discussion, these articles support George Stigler’s theory of economic regulation. Following the end of prohibition, the states were given the power to regulate alcohol in a way of their own choosing. This led to the creation of wine (and other alcoholic) wholesaler industries which have become powerful players in today’s political and economic landscape. Because industries engaged in political markets, such as distributors, are rational, it is normal (according to Stigler) for them to seek regulation as a way of increasing profit. ABC stores enjoy the price regulation that the government currently provides as it creates for them a de-facto monopoly. It is rational for industries that have the influence to seek regulations to do so. While Costco might seem like a counter-argument to Stigler’s theory (by their efforts to deregulate the wine market), Costco is simply acting in the rational manner Stigler describes – that is, Costco is seeking to deregulate because the current regulation is hurting them. Should Costco succeed, it would be rational for Costco to seek different kinds of regulation perhaps in the form of entry controls to the market (I believe Costco and Stigler would agree).

FDA De-Lights

This past summer, smokers may have noticed a change in some of their cigarette packages. For example, popular varieties such as “Marlboro Lights” and “Newport Lights” have been re-branded “Marlboro Gold” and “Newport Menthol Gold.” This is due to the recent Family Smoking Prevention and Tobacco Control Act that has restricted the use of labeling cigarettes with misleading terms that might suggest those varieties cause fewer health problems. In an effort to educate all smokers on the health risks of smoking, the FDA has prohibited the production of tobacco products labeled “light,” “low,” and “mild.” Some packages even include notices inside, such as the one depicted, elucidating any false impressions of the “light” varieties.

On the surface, it is easy to identify the affects of packaging regulations like these; bluntly stating that these cigarettes do not help in quitting smoking and that they are not any healthier is a way of making sure consumers are fully informed and are not being mislead by the advertising. This appeals to the public interest and may dissuade potential smokers from taking up these risks. However, these regulations may also help the companies that are producing them. New firms trying to jump into the tobacco industry must find a way to appeal to consumers, but with so many restrictions on what they are allowed to advertise, it is difficult to get their name out to potential consumers. Because established companies like Phillip Morris already have multiple cigarette brands out, consumers have no incentive to switch to other cigarette brands, especially if the clearly stated risks are going to be the same. This regulation protects the few companies already in the oligopoly of the tobacco industry from competition, and allows them to charge higher than optimal prices to consumers.

In my opinion, this regulation hurts more than it benefits the tobacco companies. If the FDA does its job effectively, they could deter potential consumers, not only through the explicit caveats, but because of the higher cost of taking up smoking.

How Small Businesses Exploited Wal-Mart

When I was home for fall break, I discussed the recent debit card fee regulation with my father (who works for the Star debit network). This NY times article explains the regulation that will allow the Federal Reserve Bank to set the fees debit card companies charge merchants. Merchants will benefit from the lower fees (and maybe consumers, but that remains to be seen), while Visa and MasterCard will receive lower profits. Additionally, cards issued by big banks with at least $10 billion in assets are the only ones affected by the legislation. Visa and MasterCard give banks 80% of the merchant fees, and so this is also a heavy blow to the banking industry. The Federal Reserve Bank has not yet enacted the new fees, and so the full effect of the regulation on retailers, consumers, big banks, and debit card companies remains to be seen.

Major retailers such as Wal-Mart and Amazon heavily lobbied for this regulation. This is a clear example of Olson’s “privileged” group, where a few members had an incentive to bear the entire cost of obtaining a collective good. The major retailers paid the cost for lobbying the regulation, knowing they had much to gain. On the other hand, small businesses that accept debit cards now also reap the benefits of the regulation without any of the cost. The small businesses had no individual incentive to bear the cost of lobbying, and so they acted as free riders while Wal-Mart and Amazon paid all the costs. It happens rarely that one can say that small businesses exploited Wal-Mart.