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), 15 Aug 2014 @ 5:07am

    Re: Re: Great story

    I wonder how to explain that 2 new broadband providers are actively installing their own cables/fibers here when there already are 3 other private networks in place

    I have to ask, where is this?

    Google became a "monopoly" because they offer the best solutions overall.

    Google got rich by offering good solutions, and is using that money to try to buy itself monopoly or duopoly positions in broadband and smart phones, to "feed" the search side of things. It's a good marketing move for them, but I cannot say that I like the idea of monopoly Google fiber anymore than I like monopoly comcast or monopoly TW.

    There are failures yes but there are also plenty of successful examples.

    Read carefully. I have seen a couple of successful ones (rural England I think or Wales), but even those end up with a basic problem, which is they are one flavor and one flavor only of internet, and do no encourage competition. Municipal monopolies are potentially short term gain for long term pain, as competition may not want to get involved.

    More importantly, many of the muni fiber deals depend on bond issues. We have yet to see if these things are going to balloon in installation and operating costs to the point that they hurt. It's early days and hard to draw a conclusion. I am very interested to see how it works out.

    For me, muni fiber needs to be a utility point to point that lets the consumer obtain internet service from any number of companies using the same fiber - and TV and phone services as well. The current muni deals seem to be based on obtaining internet service from one provider and making everyone take it, which is just another monopoly play.

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