Who’s Stifling Competition To Keep Prices High In Telecom?

Lynne Kiesling

According to Larry Lessig in this article from March’s Wired issue, it’s state officials. In writing about municipal WiFi, Lessig argues that

[t]he telcos’ argument isn’t much more subtle than that of the simpleton who began this column: Businesses shouldn’t have to compete against their governments. What the market can do, the government shouldn’t. Or so the fall of the Soviet Union should have taught us.

Although this principle is true enough in most cases, it is obviously not true in all. The government should certainly not do what private enterprise can do better (e.g., make computers). And the government should not prohibit private enterprise from competing against it (e.g., FedEx). But the government also should not act as the cat’s paw for one of the most powerful industries in the nation by making competition against that industry illegal, whether from government or not. This is true, at least, when it is unclear just what kind of “good” such competition might produce.

Broadband is the perfect example. The private market has failed the US so far. At the beginning, we led the world in broadband deployment. But by 2004, we ranked an embarrassing 13th. There are many places, like Philadelphia, where service is lacking. And there are many places, like San Francisco, where competition is lacking. The result of the duopoly that currently defines “competition” is that prices and service suck. We’re the world’s leader in Internet technology – except that we’re not.

The solution is not to fire private enterprise; it is instead to encourage more competition. Communities across the country are experimenting with ways to supplement private service. And these experiments are producing unexpected economic returns. Some are discovering that free wireless access increases the value of public spaces just as, well, streetlamps do. And just as streetlamps don’t make other types of lighting obsolete, free wireless access in public spaces won’t kill demand for access in private spaces. In economoid-speak, these public services may well provide positive externalities. Yet we will never recognize these externalities unless municipalities are free to experiment. That’s why the bipartisan Silicon Valley advocacy group TechNet explicitly endorses allowing local governments to compete with broadband providers.

I don’t buy it. First of all, has he never heard of crowding out (and the huge literature on it)? Second, and this is the more subtle point that I think he’s looking for in his opposition but happy not to find, municipal/private competition can lead to governments picking technology winners and/or shifting the balance in the dynamic quest for platform dominance.

A better approach would be for governments to strive to be technology neutral, focus on defining the objectives, and work (interjurisdictionally, if necessary) to reduce the transaction costs and other features of the institutional landscape that prevent robust, private competition from occurring.

UPDATE: Why yes, Steve, it is “a very polite way of saying quit mucking with the market and start clearing out the sludge that has been put in the way of effective market functioning.” Thank you for noticing! And thanks for the link Friday to la belle Coco.

And for a more extensive discussion and set of links about municipal broadband, see Ian Cook’s treatment from 23 Feb [I knew I had seen a good discussion somewhere, and then couldn’t place it! -ed.]. Ian and I are apparently drinking the same Kool-Aid these days …

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