Robert Hahn is director of economics and a professor at the Smith School, University of Oxford, and a senior fellow at the Georgetown Center for Business and Public Policy. Peter Passell is a senior fellow at the Milken Institute and the editor of its economic policy magazine, The Milken Institute Review. They are cofounders of Regulation2point0.org, a web portal on regulatory policy.
The Federal Communication Commission, which oversees the gigantic U.S. markets for telecommunications, recently released its sixteenth report on the state of competition in the wireless industry. It's chock-full of data, grist for business strategists and policy nerds seeking to understand the dynamics of a fast-paced wireless industry and its uneasy relationship with wireless regulators.
The report provides plenty of reasons to believe that innovation and competition are alive and well in the wireless industry – no surprise if you've gone shopping for a wireless provider anytime recently. But it ignores all the evidence gathered about gains in consumer choice and output coupled with lower prices in order to reach an odd conclusion (or rather, non-conclusion).
The FCC remains on the fence on the question of whether there is "effective competition" in the wireless industry. This, by the way, is the third year in a row in which the commission has punted, this time citing "the complexity of the various inter-related segments and services within the mobile wireless ecosystem" – whatever that means.
Good enough for government work? Well, at least not unexpected in the highly charged environment of telecom regulation. But important nonetheless because it gives Washington license to regulate the wireless industry in ways that could slow innovation and reduce the growth dividend provided by the ongoing wireless revolution.
The report is quite legitimately interested in traditional measures of market concentration in wireless services. For, as you may remember from Econ 101, industries with few players may figure out ways to raise prices at consumers' expense without being punished by sharp declines in customers.
One measure of market concentration, used by regulators and beloved by economists, is the Herfindahl-Hirschman Index. We'll spare you the blah-blah here; suffice it to say that a true, one-firm monopoly has an HHI of 10,000, while a market with dozens of small-fry firms competing on equal footing will have an HHI near zero. As a rule of thumb, trustbusters get anxious about industries with HHIs above 2,500.
The FCC estimates that the HHI for the U.S. wireless market to be 2,873 – high enough for concern. But even as it rings the worry bell, the agency offers context that discounts the significance of the finding: The U.S. wireless industry ranks at the top of the industrialized economies in both the number of competitors and at the low end of the distribution of HHIs.
To be sure, the reality that the U.S. wireless market is more competitive than others by traditional measures does not guarantee that it is "effectively competitive." To get a handle on that, one must dig a little deeper. And conveniently, the FCC did the spadework here:
Meanwhile, sales of data services are mushrooming thanks to booming penetration of tablets and smartphones, greater access to data-hungry applications, and the introduction of fast 4G networks.
The build-out of those faster networks, incidentally, depends on rivers of cash. The FCC estimates that investment by wireless operators totaled $24.9 billion in 2010 and $25.3 billion in 2011, with the two largest companies (Verizon and AT&T) accounting for well over half of it.
Might the wireless industry be even more innovative if it were structured differently? Perhaps. But that's not the relevant question. The real issue on the table is whether intervention by regulators saddled with political baggage and lacking crystal balls is likely to serve consumers better than the free market.
We think there is an important – but clearly circumscribed – role for regulation in keeping the mobile innovation revolution on track. The first priority is making more spectrum available to the wireless providers by accelerating the pace of auctions.
Without more spectrum, access to the data driving all those smart devices will be impeded and the incentives for integrating wireless into both business and daily life will be undermined. Moreover, once spectrum is privatized, owners need to be free to resell it in secondary markets. Otherwise, it could be frozen in the wrong places.
Finally, regulators should think long and hard before imposing restrictions on who can participate in spectrum auctions. Handicapping incumbents would help to reduce the potential threat of market concentration. On the other hand, punishing winners for their market successes is hardly a formula for maximizing innovation.
Regulators, like physicians, are well advised to, first, do no harm.