Most prescriptions for boosting growth involve macroeconomic policy: increased government spending, for instance, or lower interest rates. But competition policy has the potential to do the same, by tearing down the barriers that keep companies from entering new markets. That would stimulate business investment in the short run, and productivity in the long run.
Boosting competition isn’t easy, though, since every market is unique and some rules can do more harm than good.
In a report released April 15, President Barack Obama’s Council of Economic Advisers cite evidence of anticompetitive market power throughout the US economy. In most industries, the 50 largest companies control more market share in 2012 than they did in 1997. Corporate return on capital significantly exceeds the cost of capital by a large margin. Returns have risen far more for the most profitable companies than the least profitable. In a perfectly competitive market, new capital should flood into those profitable industries, driving down the incumbents’ returns. Growing industry concentration might reflect benign forces such as economies of scale or network effects, or less benign forces such as mergers that should have been stopped, government regulations that suppress competition, or even broader phenomena such as aging that chip away at the entrepreneurial spirit.
Mr. Obama on Friday signed an executive order that gave all executive agencies and departments 30 days to submit a list of actions they can take to promote competitive markets. At the same time he threw his weight behind a Federal Communications Commission proposal to make it easier for consumers to buy a set-top box to access cable and satellite television content rather than lease one from the provider, in hopes it will spur competition among equipment providers that boosts features and lowers prices.
The council report cites numerous small steps the administration has already taken to stimulate competition. Some fall into the familiar category of antitrust enforcement: the government’s lawsuits blocking the merger of AT&T with T-Mobile and of Thoratec, a monopoly provider of ventricular assist devices, with HeartWare, a potential competitor.
The Transportation Department has occasionally forced airlines to divest airport landing slots to make room for low-cost entrants. The FCC got wireless companies to make it easier for customers to unlock their cellphones so that they could be used on a competing network. The White House overruled a decision by the International Trade Commission to block importation of Apple iPhones that allegedly infringed Samsung’s patents, arguing ITC’s action might discourage the sharing of patents that are vital to broader innovation.
The report also cites state and local rules that limit competition: the growing use of occupational licenses that make it more expensive to perform some jobs, state “certificates of need” that can restrict the entry of new hospitals and health-care providers, and restrictions on car manufacturers selling directly to consumers, which can benefit car dealers.
Still, when the government intervenes in a market to promote competition, it also risks discouraging investments in scale and proprietary technology that, besides raising barriers to entry, leave consumers better off.
One recent example: The FCC move last year, under pressure from the White House, to classify Internet service providers as common carriers, subject to utility-like regulation, and bar them from charging content providers for better access to their networks.
The purpose of “net neutrality” was to bar ISPs from favoring some content over others. In reality, it favors large content providers, such as Netflix, at the expense of ISPs, such as Comcast, but in a way that reduces the return on ISPs’ networks. Airlines charge business and leisure travelers different prices for the same seats, reflecting the different value they place on the seat. Paid priority is a logical way for ISPs to allocate finite bandwidth to the content that values it more.
By banning paid priority, net neutrality reduces the potential return on ISPs’ networks, which could discourage investment, just as local telephone companies’ investment in the last mile of their networks languished after they were ordered to share it with “competitive local exchange carriers” in the 1990s. This means the price of bandwidth will be higher than it otherwise would, a burden on all present and future content providers.
Hal Singer, a scholar at the George Washington Institute of Public Policy, questions the justification for forcing open the set-top box market. “We’ve seen plenty of innovation in both independent video devices (Apple TV, Roku 4, Amazon Fire TV, and Google Chromecast) and even in cable-affiliated video devices (Comcast X1).” There are also fears that the FCC could force cable and satellite companies and device manufacturers into standards that quickly become obsolete, or damage relationships between suppliers of programming content and the cable companies.
But Jason Furman, chairman of the CEA, says, “We’re not being technologically prescriptive. We’re not saying there needs to be a new box that looks like ‘X’ and carries this government approved signal and this video codex.” He adds, “The way in which people have been locked in the very small number of choices in this particular case seems not to have worked out well for dynamic innovation or in terms of consumer prices.”