Archives For Duopoly Rule

A recent viral video captures a prevailing sentiment in certain corners of social media, and among some competition scholars, about how mergers supposedly work in the real world: firms start competing on price, one firm loses out, that firm agrees to sell itself to the other firm and, finally, prices are jacked up.(Warning: Keep the video muted. The voice-over is painful.)

The story ends there. In this narrative, the combination offers no possible cost savings. The owner of the firm who sold doesn’t start a new firm and begin competing tomorrow, and nor does anyone else. The story ends with customers getting screwed.

And in this telling, it’s not just horizontal mergers that look like the one in the viral egg video. It is becoming a common theory of harm regarding nonhorizontal acquisitions that they are, in fact, horizontal acquisitions in disguise. The acquired party may possibly, potentially, with some probability, in the future, become a horizontal competitor. And of course, the story goes, all horizontal mergers are anticompetitive.

Therefore, we should have the same skepticism toward all mergers, regardless of whether they are horizontal or vertical. Steve Salop has argued that a problem with the Federal Trade Commission’s (FTC) 2020 vertical merger guidelines is that they failed to adopt anticompetitive presumptions.

This perspective is not just a meme on Twitter. The FTC and U.S. Justice Department (DOJ) are currently revising their guidelines for merger enforcement and have issued a request for information (RFI). The working presumption in the RFI (and we can guess this will show up in the final guidelines) is exactly the takeaway from the video: Mergers are bad. Full stop.

The RFI repeatedly requests information that would support the conclusion that the agencies should strengthen merger enforcement, rather than information that might point toward either stronger or weaker enforcement. For example, the RFI asks:

What changes in standards or approaches would appropriately strengthen enforcement against mergers that eliminate a potential competitor?

This framing presupposes that enforcement should be strengthened against mergers that eliminate a potential competitor.

Do Monopoly Profits Always Exceed Joint Duopoly Profits?

Should we assume enforcement, including vertical enforcement, needs to be strengthened? In a world with lots of uncertainty about which products and companies will succeed, why would an incumbent buy out every potential competitor? The basic idea is that, since profits are highest when there is only a single monopolist, that seller will always have an incentive to buy out any competitors.

The punchline for this anti-merger presumption is “monopoly profits exceed duopoly profits.” The argument is laid out most completely by Salop, although the argument is not unique to him. As Salop points out:

I do not think that any of the analysis in the article is new. I expect that all the points have been made elsewhere by others and myself.

Under the model that Salop puts forward, there should, in fact, be a presumption against any acquisition, not just horizontal acquisitions. He argues that:

Acquisitions of potential or nascent competitors by a dominant firm raise inherent anticompetitive concerns. By eliminating the procompetitive impact of the entry, an acquisition can allow the dominant firm to continue to exercise monopoly power and earn monopoly profits. The dominant firm also can neutralize the potential innovation competition that the entrant would provide.

We see a presumption against mergers in the recent FTC challenge of Meta’s purchase of Within. While Meta owns Oculus, a virtual-reality headset and Within owns virtual-reality fitness apps, the FTC challenged the acquisition on grounds that:

The Acquisition would cause anticompetitive effects by eliminating potential competition from Meta in the relevant market for VR dedicated fitness apps.

Given the prevalence of this perspective, it is important to examine the basic model’s assumptions. In particular, is it always true that—since monopoly profits exceed duopoly profits—incumbents have an incentive to eliminate potential competition for anticompetitive reasons?

I will argue no. The notion that monopoly profits exceed joint-duopoly profits rests on two key assumptions that hinder the simple application of the “merge to monopoly” model to antitrust.

First, even in a simple model, it is not always true that monopolists have both the ability and incentive to eliminate any potential entrant, simply because monopoly profits exceed duopoly profits.

For the simplest complication, suppose there are two possible entrants, rather than the common assumption of just one entrant at a time. The monopolist must now pay each of the entrants enough to prevent entry. But how much? If the incumbent has already paid one potential entrant not to enter, the second could then enter the market as a duopolist, rather than as one of three oligopolists. Therefore, the incumbent must pay the second entrant an amount sufficient to compensate a duopolist, not their share of a three-firm oligopoly profit. The same is true for buying the first entrant. To remain a monopolist, the incumbent would have to pay each possible competitor duopoly profits.

Because monopoly profits exceed duopoly profits, it is profitable to pay a single entrant half of the duopoly profit to prevent entry. It is not, however, necessarily profitable for the incumbent to pay both potential entrants half of the duopoly profit to avoid entry by either. 

Now go back to the video. Suppose two passersby, who also happen to have chickens at home, notice that they can sell their eggs. The best part? They don’t have to sit around all day; the lady on the right will buy them. The next day, perhaps, two new egg sellers arrive.

For a simple example, consider a Cournot oligopoly model with an industry-inverse demand curve of P(Q)=1-Q and constant marginal costs that are normalized to zero. In a market with N symmetric sellers, each seller earns 1/((N+1)^2) in profits. A monopolist makes a profit of 1/4. A duopolist can expect to earn a profit of 1/9. If there are three potential entrants, plus the incumbent, the monopolist must pay each the duopoly profit of 3*1/9=1/3, which exceeds the monopoly profits of 1/4.

In the Nash/Cournot equilibrium, the incumbent will not acquire any of the competitors, since it is too costly to keep them all out. With enough potential entrants, the monopolist in any market will not want to buy any of them out. In that case, the outcome involves no acquisitions.

If we observe an acquisition in a market with many potential entrants, which any given market may or may not have, it cannot be that the merger is solely about obtaining monopoly profits, since the model above shows that the incumbent doesn’t have incentives to do that.

If our model captures the dynamics of the market (which it may or may not, depending on a given case’s circumstances) but we observe mergers, there must be another reason for that deal besides maintaining a monopoly. The presence of multiple potential entrants overturns the antitrust implications of the truism that monopoly profits exceed duopoly profits. The question turns instead to empirical analysis of the merger and market in question, as to whether it would be profitable to acquire all potential entrants.

The second simplifying assumption that restricts the applicability of Salop’s baseline model is that the incumbent has the lowest cost of production. He rules out the possibility of lower-cost entrants in Footnote 2:

Monopoly profits are not always higher. The entrant may have much lower costs or a better or highly differentiated product. But higher monopoly profits are more usually the case.

If one allows the possibility that an entrant may have lower costs (even if those lower costs won’t be achieved until the future, when the entrant gets to scale), it does not follow that monopoly profits (under the current higher-cost monopolist) necessarily exceed duopoly profits (with a lower-cost producer involved).

One cannot simply assume that all firms have the same costs or that the incumbent is always the lowest-cost producer. This is not just a modeling choice but has implications for how we think about mergers. As Geoffrey Manne, Sam Bowman, and Dirk Auer have argued:

Although it is convenient in theoretical modeling to assume that similarly situated firms have equivalent capacities to realize profits, in reality firms vary greatly in their capabilities, and their investment and other business decisions are dependent on the firm’s managers’ expectations about their idiosyncratic abilities to recognize profit opportunities and take advantage of them—in short, they rest on the firm managers’ ability to be entrepreneurial.

Given the assumptions that all firms have identical costs and there is only one potential entrant, Salop’s framework would find that all possible mergers are anticompetitive and that there are no possible efficiency gains from any merger. That’s the thrust of the video. We assume that the whole story is two identical-seeming women selling eggs. Since the acquired firm cannot, by assumption, have lower costs of production, it cannot improve on the incumbent’s costs of production.

Many Reasons for Mergers

But whether a merger is efficiency-reducing and bad for competition and consumers needs to be proven, not just assumed.

If we take the basic acquisition model literally, every industry would have just one firm. Every incumbent would acquire every possible competitor, no matter how small. After all, monopoly profits are higher than duopoly profits, and so the incumbent both wants to and can preserve its monopoly profits. The model does not give us a way to disentangle when mergers would stop without antitrust enforcement.

Mergers do not affect the production side of the economy, under this assumption, but exist solely to gain the market power to manipulate prices. Since the model finds no downsides for the incumbent to acquiring a competitor, it would naturally acquire every last potential competitor, no matter how small, unless prevented by law. 

Once we allow for the possibility that firms differ in productivity, however, it is no longer true that monopoly profits are greater than industry duopoly profits. We can see this most clearly in situations where there is “competition for the market” and the market is winner-take-all. If the entrant to such a market has lower costs, the profit under entry (when one firm wins the whole market) can be greater than the original monopoly profits. In such cases, monopoly maintenance alone cannot explain an entrant’s decision to sell.

An acquisition could therefore be both procompetitive and increase consumer welfare. For example, the acquisition could allow the lower-cost entrant to get to scale quicker. The acquisition of Instagram by Facebook, for example, brought the photo-editing technology that Instagram had developed to a much larger market of Facebook users and provided a powerful monetization mechanism that was otherwise unavailable to Instagram.

In short, the notion that incumbents can systematically and profitably maintain their market position by acquiring potential competitors rests on assumptions that, in practice, will regularly and consistently fail to materialize. It is thus improper to assume that most of these acquisitions reflect efforts by an incumbent to anticompetitively maintain its market position.

Why do digital industries routinely lead to one company having a very large share of the market (at least if one defines markets narrowly)? To anyone familiar with competition policy discussions, the answer might seem obvious: network effects, scale-related economies, and other barriers to entry lead to winner-take-all dynamics in platform industries. Accordingly, it is that believed the first platform to successfully unlock a given online market enjoys a determining first-mover advantage.

This narrative has become ubiquitous in policymaking circles. Thinking of this sort notably underpins high-profile reports on competition in digital markets (here, here, and here), as well ensuing attempts to regulate digital platforms, such as the draft American Innovation and Choice Online Act and the EU’s Digital Markets Act.

But are network effects and the like the only ways to explain why these markets look like this? While there is no definitive answer, scholars routinely overlook an alternative explanation that tends to undercut the narrative that tech markets have become non-contestable.

The alternative model is simple: faced with zero prices and the almost complete absence of switching costs, users have every reason to join their preferred platform. If user preferences are relatively uniform and one platform has a meaningful quality advantage, then there is every reason to expect that most consumers will all join the same one—even though the market remains highly contestable. On the other side of the equation, because platforms face very few capacity constraints, there are few limits to a given platform’s growth. As will be explained throughout this piece, this intuition is as old as economics itself.

The Bertrand Paradox

In 1883, French mathematician Joseph Bertrand published a powerful critique of two of the most high-profile economic thinkers of his time: the late Antoine Augustin Cournot and LĂ©on Walras (it would be another seven years before Alfred Marshall published his famous principles of economics).

Bertrand criticized several of Cournot and Walras’ widely accepted findings. This included Cournot’s conclusion that duopoly competition would lead to prices above marginal cost—or, in other words, that duopolies were imperfectly competitive.

By reformulating the problem slightly, Bertand arrived at the opposite conclusion. He argued that each firm’s incentive to undercut its rival would ultimately lead to marginal cost pricing, and one seller potentially capturing the entire market:

There is a decisive objection [to Cournot’s model]: According to his hypothesis, no [supracompetitive] equilibrium is possible. There is no limit to price decreases; whatever the joint price being charged by firms, a competitor could always undercut this price and, with few exceptions, attract all consumers. If the competitor is allowed to get away with this [i.e. the rival does not react], it will double its profits.

This result is mainly driven by the assumption that, unlike in Cournot’s model, firms can immediately respond to their rival’s chosen price/quantity. In other words, Bertrand implicitly framed the competitive process as price competition, rather than quantity competition (under price competition, firms do not face any capacity constraints and they cannot commit to producing given quantities of a good):

If Cournot’s calculations mask this result, it is because of a remarkable oversight. Referring to them as D and D’, Cournot deals with the quantities sold by each of the two competitors and treats them as independent variables. He assumes that if one were to change by the will of one of the two sellers, the other one could remain fixed. The opposite is evidently true.

This later came to be known as the “Bertrand paradox”—the notion that duopoly-market configurations can produce the same outcome as perfect competition (i.e., P=MC).

But while Bertrand’s critique was ostensibly directed at Cournot’s model of duopoly competition, his underlying point was much broader. Above all, Bertrand seemed preoccupied with the notion that expressing economic problems mathematically merely gives them a veneer of accuracy. In that sense, he was one of the first economists (at least to my knowledge) to argue that the choice of assumptions has a tremendous influence on the predictions of economic models, potentially rendering them unreliable:

On other occasions, Cournot introduces assumptions that shield his reasoning from criticism—scholars can always present problems in a way that suits their reasoning.

All of this is not to say that Bertrand’s predictions regarding duopoly competition necessarily hold in real-world settings; evidence from experimental settings is mixed. Instead, the point is epistemological. Bertrand’s reasoning was groundbreaking because he ventured that market structures are not the sole determinants of consumer outcomes. More broadly, he argued that assumptions regarding the competitive process hold significant sway over the results that a given model may produce (and, as a result, over normative judgements concerning the desirability of given market configurations).

The Theory of Contestable Markets

Bertrand is certainly not the only economist to have suggested market structures alone do not determine competitive outcomes. In the early 1980s, William Baumol (and various co-authors) went one step further. Baumol argued that, under certain conditions, even monopoly market structures could deliver perfectly competitive outcomes. This thesis thus rejected the Structure-Conduct-Performance (“SCP”) Paradigm that dominated policy discussions of the time.

Baumol’s main point was that industry structure is not the main driver of market “contestability,” which is the key determinant of consumer outcomes. In his words:

In the limit, when entry and exit are completely free, efficient incumbent monopolists and oligopolists may in fact be able to prevent entry. But they can do so only by behaving virtuously, that is, by offering to consumers the benefits which competition would otherwise bring. For every deviation from good behavior instantly makes them vulnerable to hit-and-run entry.

For instance, it is widely accepted that “perfect competition” leads to low prices because firms are price-takers; if one does not sell at marginal cost, it will be undercut by rivals. Observers often assume this is due to the number of independent firms on the market. Baumol suggests this is wrong. Instead, the result is driven by the sanction that firms face for deviating from competitive pricing.

In other words, numerous competitors are a sufficient, but not necessary condition for competitive pricing. Monopolies can produce the same outcome when there is a present threat of entry and an incumbent’s deviation from competitive pricing would be sanctioned. This is notably the case when there are extremely low barriers to entry.

Take this hypothetical example from the world of cryptocurrencies. It is largely irrelevant to a user whether there are few or many crypto exchanges on which to trade coins, nonfungible tokens (NFTs), etc. What does matter is that there is at least one exchange that meets one’s needs in terms of both price and quality of service. This could happen because there are many competing exchanges, or because a failure to meet my needs by the few (or even one) exchange that does exist would attract the entry of others to which I could readily switch—thus keeping the behavior of the existing exchanges in check.

This has far-reaching implications for antitrust policy, as Baumol was quick to point out:

This immediately offers what may be a new insight on antitrust policy. It tells us that a history of absence of entry in an industry and a high concentration index may be signs of virtue, not of vice. This will be true when entry costs in our sense are negligible.

Given what precedes, Baumol surmised that industry structure must be driven by endogenous factors—such as firms’ cost structures—rather than the intensity of competition that they face. For instance, scale economies might make monopoly (or another structure) the most efficient configuration in some industries. But so long as rivals can sanction incumbents for failing to compete, the market remains contestable. Accordingly, at least in some industries, both the most efficient and the most contestable market configuration may entail some level of concentration.

To put this last point in even more concrete terms, online platform markets may have features that make scale (and large market shares) efficient. If so, there is every reason to believe that competition could lead to more, not less, concentration. 

How Contestable Are Digital Markets?

The insights of Bertrand and Baumol have important ramifications for contemporary antitrust debates surrounding digital platforms. Indeed, it is critical to ascertain whether the (relatively) concentrated market structures we see in these industries are a sign of superior efficiency (and are consistent with potentially intense competition), or whether they are merely caused by barriers to entry.

The barrier-to-entry explanation has been repeated ad nauseam in recent scholarly reports, competition decisions, and pronouncements by legislators. There is thus little need to restate that thesis here. On the other hand, the contestability argument is almost systematically ignored.

Several factors suggest that online platform markets are far more contestable than critics routinely make them out to be.

First and foremost, consumer switching costs are extremely low for most online platforms. To cite but a few examples: Changing your default search engine requires at most a couple of clicks; joining a new social network can be done by downloading an app and importing your contacts to the app; and buying from an alternative online retailer is almost entirely frictionless, thanks to intermediaries such as PayPal.

These zero or near-zero switching costs are compounded by consumers’ ability to “multi-home.” In simple terms, joining TikTok does not require users to close their Facebook account. And the same applies to other online services. As a result, there is almost no opportunity cost to join a new platform. This further reduces the already tiny cost of switching.

Decades of app development have greatly improved the quality of applications’ graphical user interfaces (GUIs), to such an extent that costs to learn how to use a new app are mostly insignificant. Nowhere is this more apparent than for social media and sharing-economy apps (it may be less true for productivity suites that enable more complex operations). For instance, remembering a couple of intuitive swipe motions is almost all that is required to use TikTok. Likewise, ridesharing and food-delivery apps merely require users to be familiar with the general features of other map-based applications. It is almost unheard of for users to complain about usability—something that would have seemed impossible in the early 21st century, when complicated interfaces still plagued most software.

A second important argument in favor of contestability is that, by and large, online platforms face only limited capacity constraints. In other words, platforms can expand output rapidly (though not necessarily costlessly).

Perhaps the clearest example of this is the sudden rise of the Zoom service in early 2020. As a result of the COVID pandemic, Zoom went from around 10 million daily active users in early 2020 to more than 300 million by late April 2020. Despite being a relatively data-intensive service, Zoom did not struggle to meet this new demand from a more than 30-fold increase in its user base. The service never had to turn down users, reduce call quality, or significantly increase its price. In short, capacity largely followed demand for its service. Online industries thus seem closer to the Bertrand model of competition, where the best platform can almost immediately serve any consumers that demand its services.

Conclusion

Of course, none of this should be construed to declare that online markets are perfectly contestable. The central point is, instead, that critics are too quick to assume they are not. Take the following examples.

Scholars routinely cite the putatively strong concentration of digital markets to argue that big tech firms do not face strong competition, but this is a non sequitur. As Bertrand and Baumol (and others) show, what matters is not whether digital markets are concentrated, but whether they are contestable. If a superior rival could rapidly gain user traction, this alone will discipline the behavior of incumbents.

Markets where incumbents do not face significant entry from competitors are just as consistent with vigorous competition as they are with barriers to entry. Rivals could decline to enter either because incumbents have aggressively improved their product offerings or because they are shielded by barriers to entry (as critics suppose). The former is consistent with competition, the latter with monopoly slack.

Similarly, it would be wrong to presume, as many do, that concentration in online markets is necessarily driven by network effects and other scale-related economies. As ICLE scholars have argued elsewhere (here, here and here), these forces are not nearly as decisive as critics assume (and it is debatable that they constitute barriers to entry).

Finally, and perhaps most importantly, this piece has argued that many factors could explain the relatively concentrated market structures that we see in digital industries. The absence of switching costs and capacity constraints are but two such examples. These explanations, overlooked by many observers, suggest digital markets are more contestable than is commonly perceived.

In short, critics’ failure to meaningfully grapple with these issues serves to shape the prevailing zeitgeist in tech-policy debates. Cournot and Bertrand’s intuitions about oligopoly competition may be more than a century old, but they continue to be tested empirically. It is about time those same standards were applied to tech-policy debates.

Recently, Commissioner Pai praised the introduction of bipartisan legislation to protect joint sales agreements (“JSAs”) between local television stations. He explained that

JSAs are contractual agreements that allow broadcasters to cut down on costs by using the same advertising sales force. The efficiencies created by JSAs have helped broadcasters to offer services that benefit consumers, especially in smaller markets
. JSAs have served communities well and have promoted localism and diversity in broadcasting. Unfortunately, the FCC’s new restrictions on JSAs have already caused some stations to go off the air and other stations to carry less local news.

fccThe “new restrictions” to which Commissioner Pai refers were recently challenged in court by the National Association of Broadcasters (NAB), et. al., and on April 20, the International Center for Law & Economics and a group of law and economics scholars filed an amicus brief with the D.C. Circuit Court of Appeals in support of the petition, asking the court to review the FCC’s local media ownership duopoly rule restricting JSAs.

Much as it did with with net neutrality, the FCC is looking to extend another set of rules with no basis in sound economic theory or established facts.

At issue is the FCC’s decision both to retain the duopoly rule and to extend that rule to certain JSAs, all without completing a legally mandated review of the local media ownership rules, due since 2010 (but last completed in 2007).

The duopoly rule is at odds with sound competition policy because it fails to account for drastic changes in the media market that necessitate redefinition of the market for television advertising. Moreover, its extension will bring a halt to JSAs currently operating (and operating well) in nearly 100 markets.  As the evidence on the FCC rulemaking record shows, many of these JSAs offer public interest benefits and actually foster, rather than stifle, competition in broadcast television markets.

In the world of media mergers generally, competition law hasn’t yet caught up to the obvious truth that new media is competing with old media for eyeballs and advertising dollars in basically every marketplace.

For instance, the FTC has relied on very narrow market definitions to challenge newspaper mergers without recognizing competition from television and the Internet. Similarly, the generally accepted market in which Google’s search conduct has been investigated is something like “online search advertising” — a market definition that excludes traditional marketing channels, despite the fact that advertisers shift their spending between these channels on a regular basis.

But the FCC fares even worse here. The FCC’s duopoly rule is premised on an “eight voices” test for local broadcast stations regardless of the market shares of the merging stations. In other words, one entity cannot own FCC licenses to two or more TV stations in the same local market unless there are at least eight independently owned stations in that market, even if their combined share of the audience or of advertising are below the level that could conceivably give rise to any inference of market power.

Such a rule is completely unjustifiable under any sensible understanding of competition law.

Can you even imagine the FTC or DOJ bringing an 8 to 7 merger challenge in any marketplace? The rule is also inconsistent with the contemporary economic learning incorporated into the 2010 Merger Guidelines, which looks at competitive effects rather than just counting competitors.

Not only did the FCC fail to analyze the marketplace to understand how much competition there is between local broadcasters, cable, and online video, but, on top of that, the FCC applied this outdated duopoly rule to JSAs without considering their benefits.

The Commission offers no explanation as to why it now believes that extending the duopoly rule to JSAs, many of which it had previously approved, is suddenly necessary to protect competition or otherwise serve the public interest. Nor does the FCC cite any evidence to support its position. In fact, the record evidence actually points overwhelmingly in the opposite direction.

As a matter of sound regulatory practice, this is bad enough. But Congress directed the FCC in Section 202(h) of the Telecommunications Act of 1996 to review all of its local ownership rules every four years to determine whether they were still “necessary in the public interest as the result of competition,” and to repeal or modify those that weren’t. During this review, the FCC must examine the relevant data and articulate a satisfactory explanation for its decision.

So what did the Commission do? It announced that, instead of completing its statutorily mandated 2010 quadrennial review of its local ownership rules, it would roll that review into a new 2014 quadrennial review (which it has yet to perform). Meanwhile, the Commission decided to retain its duopoly rule pending completion of that review because it had “tentatively” concluded that it was still necessary.

In other words, the FCC hasn’t conducted its mandatory quadrennial review in more than seven years, and won’t, under the new rules, conduct one for another year and a half (at least). Oh, and, as if nothing of relevance has changed in the market since then, it “tentatively” maintains its already suspect duopoly rule in the meantime.

In short, because the FCC didn’t conduct the review mandated by statute, there is no factual support for the 2014 Order. By relying on the outdated findings from its earlier review, the 2014 Order fails to examine the significant changes both in competition policy and in the market for video programming that have occurred since the current form of the rule was first adopted, rendering the rulemaking arbitrary and capricious under well-established case law.

Had the FCC examined the record of the current rulemaking, it would have found substantial evidence that undermines, rather than supports, the FCC’s rule.

Economic studies have shown that JSAs can help small broadcasters compete more effectively with cable and online video in a world where their advertising revenues are drying up and where temporary economies of scale (through limited contractual arrangements like JSAs) can help smaller, local advertising outlets better implement giant, national advertising campaigns. A ban on JSAs will actually make it less likely that competition among local broadcasters can survive, not more.

OfficialPaiCommissioner Pai, in his dissenting statement to the 2014 Order, offered a number of examples of the benefits of JSAs (all of them studiously ignored by the Commission in its Order). In one of these, a JSA enabled two stations in Joplin, Missouri to use their $3.5 million of cost savings from a JSA to upgrade their Doppler radar system, which helped save lives when a devastating tornado hit the town in 2011. But such benefits figure nowhere in the FCC’s “analysis.”

Several econometric studies also provide empirical support for the (also neglected) contention that duopolies and JSAs enable stations to improve the quality and prices of their programming.

One study, by Jeff Eisenach and Kevin Caves, shows that stations operating under these agreements are likely to carry significantly more news, public affairs, and current affairs programming than other stations in their markets. The same study found an 11 percent increase in audience shares for stations acquired through a duopoly. Meanwhile, a study by Hal Singer and Kevin Caves shows that markets with JSAs have advertising prices that are, on average, roughly 16 percent lower than in non-duopoly markets — not higher, as would be expected if JSAs harmed competition.

And again, Commissioner Pai provides several examples of these benefits in his dissenting statement. In one of these, a JSA in Wichita, Kansas enabled one of the two stations to provide Spanish-language HD programming, including news, weather, emergency and community information, in a market where that Spanish-language programming had not previously been available. Again — benefit ignored.

Moreover, in retaining its duopoly rule on the basis of woefully outdated evidence, the FCC completely ignores the continuing evolution in the market for video programming.

In reality, competition from non-broadcast sources of programming has increased dramatically since 1999. Among other things:

  • VideoScreensToday, over 85 percent of American households watch TV over cable or satellite. Most households now have access to nearly 200 cable channels that compete with broadcast TV for programming content and viewers.
  • In 2014, these cable channels attracted twice as many viewers as broadcast channels.
  • Online video services such as Netflix, Amazon Prime, and Hulu have begun to emerge as major new competitors for video programming, leading 179,000 households to “cut the cord” and cancel their cable subscriptions in the third quarter of 2014 alone.
  • Today, 40 percent of U.S. households subscribe to an online streaming service; as a result, cable ratings among adults fell by nine percent in 2014.
  • At the end of 2007, when the FCC completed its last quadrennial review, the iPhone had just been introduced, and the launch of the iPad was still more than two years away. Today, two-thirds of Americans have a smartphone or tablet over which they can receive video content, using technology that didn’t even exist when the FCC last amended its duopoly rule.

In the face of this evidence, and without any contrary evidence of its own, the Commission’s action in reversing 25 years of agency practice and extending its duopoly rule to most JSAs is arbitrary and capricious.

The law is pretty clear that the extent of support adduced by the FCC in its 2014 Rule is insufficient. Among other relevant precedent (and there is a lot of it):

The Supreme Court has held that an agency

must examine the relevant data and articulate a satisfactory explanation for its action, including a rational connection between the facts found and the choice made.

In the DC Circuit:

the agency must explain why it decided to act as it did. The agency’s statement must be one of ‘reasoning’; it must not be just a ‘conclusion’; it must ‘articulate a satisfactory explanation’ for its action.

And:

[A]n agency acts arbitrarily and capriciously when it abruptly departs from a position it previously held without satisfactorily explaining its reason for doing so.

Also:

The FCC ‘cannot silently depart from previous policies or ignore precedent’ . . . .”

And most recently in Judge Silberman’s concurrence/dissent in the 2010 Verizon v. FCC Open Internet Order case:

factual determinations that underly [sic] regulations must still be premised on demonstrated — and reasonable — evidential support

None of these standards is met in this case.

It will be noteworthy to see what the DC Circuit does with these arguments given the pending Petitions for Review of the latest Open Internet Order. There, too, the FCC acted without sufficient evidentiary support for its actions. The NAB/Stirk Holdings case may well turn out to be a bellwether for how the court views the FCC’s evidentiary failings in that case, as well.

The scholars joining ICLE on the brief are:

  • Babette E. Boliek, Associate Professor of Law, Pepperdine School of Law
  • Henry N. Butler, George Mason University Foundation Professor of Law and Executive Director of the Law & Economics Center, George Mason University School of Law (and newly appointed dean).
  • Richard Epstein, Laurence A. Tisch Professor of Law, Classical Liberal Institute, New York University School of Law
  • Stan Liebowitz, Ashbel Smith Professor of Economics, University of Texas at Dallas
  • Fred McChesney, de la Cruz-Mentschikoff Endowed Chair in Law and Economics, University of Miami School of Law
  • Paul H. Rubin, Samuel Candler Dobbs Professor of Economics, Emory University
  • Michael E. Sykuta, Associate Professor in the Division of Applied Social Sciences and Director of the Contracting and Organizations Research Institute, University of Missouri

The full amicus brief is available here.