Parallel Conduct: How ISPs Make The Consolidated Internet Service Market Even Worse

from the making-monopolies dept

Much of the focus on consolidation in the broadband industry has focused on national market share. The problem is focusing solely on national market share implies that large companies are competing, when they don't. Just because there are multiple companies in an industry doesn't mean those companies compete. This is especially true in the broadband and wireless industries. As Susan Crawford explained

These companies don't have to agree in writing to carry this out or even raise their prices; they can simply, within their separate geographic and product territories, bundle and tie their services, buy up inputs that a competitor might need, and refuse to connect to competitors — among many other potential tactics. It's in their interest for these local monopolists to cooperate, because any defection would make the whole system crumble.

What Crawford is describing is parallel conduct, which is when companies that would otherwise compete create a monopoly-like setting without having to merge or coordinate operations. Parallel conduct in the broadband industry is not hypothetical. In 2011, Comcast and Time-Warner Cable sold parts of the wireless spectrum they owned in exchange for an agreement that Verizon would stop expanding its fiber optic network. Essentially, Comcast and Time-Warner Cable paid Verizon to stop offering new high-speed broadband service. (As part of the deal, Comcast and Time-Warner Cable also further divided up the United States geographically, foreshadowing the merger between the two companies.)

The 2011 agreement also resulted in Comcast and Verizon's "joint marketing campaign," where they are charging identical prices for Internet, television and phone service. In addition to charging the same price for the same service, Comcast and Verizon also would strongly encourage customers to buy service "bundles," of Internet, cable TV, and phone service. The bundles themselves are a potentially anti-competitive form of product tying. In antitrust law, tying is presumptively illegal when tied with market power.

Parallel conduct is not, by itself, harmful. In fact, companies imitating one another often benefits consumers. Google, for example, which is widely considered one of the most innovative tech companies of the last decade, has largely offered new services which are already offered by other companies, such as search (Yahoo), email (Hotmail), and driving directions (MapQuest).

There are two forms of parallel conduct: parallel pricing and parallel exclusion. With parallel pricing, companies can mimic monopoly behavior by pricing their products at the same level. Parallel exclusion is where companies can enter into similar agreements with suppliers or customers. For both parallel pricing and parallel exclusion, it is much more likely to occur in industries where there are fewer competitors, and where those competitors compete less within geographic markets. The result of parallel conduct is that a market with a small number of competitors, an oligopoly, acts as one firm, which is referred to—perhaps euphemistically—as a perfect monopoly.

Tim Wu and C. Scott Hemphill wrote an article arguing that parallel exclusion provides a better metric for antitrust enforcement than parallel pricing. In competitive markets, with lots of competitors and low profit margins, companies are forced to price their goods and services at the same price. However, in consolidated, noncompetitive markets, companies may also price goods similarly, through an agreement, explicit or implicit, to reduce competition. If companies are pricing similarly, there is no way to know if that is the result of a competitive marketplace or collusion. Punishing companies that are pricing similarly as a result of competition would be counterproductive.

The deal between Comcast, Time-Warner Cable and Verizon is the most pernicious form of parallel conduct: an exclusionary price control agreement between corporate behemoths. Granted, the agreement isn't exactly news. It happened in 2012. But the Comcast-Time Warner Cable merger has changed the competitive landscape in the industry. Absent the agreement between Comcast, Time-Warner Cable and Verizon, the number of truly national high-speed broadband providers would have gone from two to three. Post-merger, it will go from two to one.

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Filed Under: antitrust, market power, monopolies, net neutrality, oligopolies, parallel conduct, pricing
Companies: comcast, time warner cable, verizon


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  1. icon
    Whatever (profile), 14 Aug 2014 @ 11:55pm

    Great story

    This is a really great story, one with plenty of detail and a good explanation of the current situation. However, it seems to be lacking in an explanation of how we get out of this apparent dead end.

    For me, the problem is that the current situation is effectively natural. It has been dictated since the very start of the internet age (and even before).

    As soon as we stopped using dial up to connect to the internet, the natural ISPs were the phone and cable companies who had the ability to provide data services over their existing lines. The amount of investment is high, but it is still much lower than it would be for anyone else wanting to wire up and enter the market. Moreover, both the phone and cable companies were already effective monopolies in their areas, and they have moved on to being duopolies when it comes to the internet.

    Technology and de-regulation has allowed for things like VoIP phones, which means that the cable companies have gotten into phones, and IPtv means that phone companies have gotten into delivering cable TV. In all cases, the reality is formed by who already had the wires in the homes. Few if any are lining up to wire up big parts of the US in a speculative nature.

    There should be little surprise that there is no real competition between the parties. The markets themselves are finite, there are only so many customers in the pool, and hugely discounted prices may gain you some market share but may not gain you bottom line profits. After the initial predatory behavior as each has encroached on the other's native services (TV or phone), the real market development comes from getting your existing customers to buy more services from you, thus bundling is a pretty good business option. It gets you more income, and locks you competitor out.

    The companies who are wanting to come in and wire homes are doing it in the worst ways possible. Google is already a monopolistic player who are willing to use their insanely deep pockets to purchase a seat in the monopoly world. Muni broadband tend to be both cherry picking and long term costly, nobody seems to be thinking through the long term implications of the municipality having another service to maintain.

    So the question is: If you want to kill a monopoly, you need a solution: What is the actual proposal to fix it?

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