Antitrust Law Daily Wrap Up, ANTITRUST NEWS: Wright discusses regulatory approach to “disruptive competition” through technology, (Apr 6, 2015)

By Linda O’Brien, J.D., LL.M.

The development of new technologies can disrupt markets and create a boon for consumers, said FTC Commissioner Joshua Wright in a speech at Clemson University’s Big Ideas about Information Lecture in Clemson, South Carolina on April 2.

Wright began his address, entitled “Regulation in High-Tech Markets: Public Choice, Regulatory Capture, and the FTC,” by noting that disruptive competition through the use of technology can spur economic growth and generate enormous benefits for consumers. One immediate question that arises when thinking about disruptive competition is what type of firm —an incumbent or new entrant — typically develops the technology or business model that disrupts competition in an existing industry? Sometimes incumbent firms develop technologies that disrupt competition in a marketplace, but disruption is often the work of emerging firms that use new technologies to challenge incumbents.

Of particular interest is how incumbent firms respond to disruption developed by a new market participant, according to Wright. As examples, how do established hotels respond to new competition from Airbnb or existing taxicab companies to the rise of app-based services like Uber and Lyft? Incumbent responses to disruptive competition can be divided into three responses. First, there is competition on the merits, such as competing on price, quality, efficiency, and innovation. A second response is exclusionary conduct by raising the entrant’s cost of competing in the marketplace in order to stave off competition. A third category involves attempts to raise rivals’ costs in the sphere of public competition, including influencing lawmakers and regulators to act in ways that can affect competition in the marketplace.

The tactics employed in public competition are varied and numerous, Wright stated. One example is the net neutrality regulation recently adopted by the Federal Communications Commission (FCC), which will have the effect of raising the cost of entry for wireless Internet service providers by reclassifying broadband providers. In Wright’s view, in the context of potentially disruptive forms of competition through new technologies or new business models, there should be skepticism regarding regulatory efforts to have the effect of favoring incumbent industry participants. There is a vast literature in economics that has been developed over the last 60 years —public choice and regulatory economics —that explains how government decision-makers purporting to act in the public interest are in influenced by economic forces.

Regulatory capture and public choice. Wright noted that it was worthwhile to consider the theoretical bases for economic regulation when considering why lawmakers sometimes adopt certain rules that harm, rather than benefit, the public at large. General regulation focuses upon potential market failure involving monopoly power, externalities, or asymmetric information. Successful identification of a market failure is necessary but not sufficient to justify regulation on economic grounds.

Public choice economists observed three important facts about regulation: (1) regulatory legislation redistributes wealth; (2) the behavior of legislators is driven by their desire to remain in office, which means that legislation is designed to maximize political support; (3) interest groups compete by offering political support in exchange for favorable legislation, according to Wright. Considering these facts together, the general result that follows is that regulation is likely to be biased toward benefitting interest groups that are better organized and gain more from favorable legislation. These insights help us understand the related concept of regulatory capture. Under capture theory, regulation is either supplied in response to the industry’s demand for regulation or the regulatory agency comes to be controlled by the industry over time.

Public restraints and the FTC. Wright highlighted that, for many years, the FTC has used its mantle to comment on legislation and regulation that may restrain competition in a way that harms consumers. Its advocacy program has been a priority at the Commission since the early 1980s. The FTC’s Office of Policy Planning is at the helm of the Commission’s advocacy program and its comments typically take the form of written letters, comments, or testimony to federal, state, and local legislators.

Antitrust enforcement. A form of disruptive competition that has captured the Commission’s recent attention is smartphone applications and the taxicab industry, Wright noted. The taxi industry was largely unregulated until the 1930s. Since then, the industry has been heavily regulated by local governments though there is significant variation in the type and extent of the regulation. The taxi industry has been undergoing a revolution since 2007 when the smartphone first came to market. Application developers such as Uber, Hailo, Lyft, and others are using the GPS capabilities of smartphones to allow consumers to hail a ride, watch on a map as the driver arrives to pick them up, pay for their rides electronically, and to rate their experience with particular drivers. Smartphone apps can facilitate price transparency and price competition, in Wright’s view.

Public choice economics, regulatory economics, and the history of regulation in the United States offer many lessons to the modern regulator, Wright noted. He concluded by recommending three simple and practical rules for regulators that are implied if not required by those lessons. First, public restraints are especially pernicious for consumers and an especially worthy target for antitrust agencies. Second, regulators and enforcers should use all of their available tools to fight public restraints of trade. Third, apply a strong but rebuttable presumption against regulation favoring incumbents over new entrants or accepting invitations from disgruntled firms to have the antitrust agencies sue their rivals.

News: Antitrust FederalTradeCommissionNews