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Pre-emptive Regulation of Vertical Integration Could Harm Consumers

Pre-emptive Regulation of Vertical Integration Could Harm Consumers

Vertical Integration is Inherent in Efficient Firms and Markets

Contact: Amy Smorodin
(202) 828-4405

November 8, 2010 – Pre-emptive regulation of vertical integration could harm, rather than help, consumer welfare because integration is not predictive of future market problems, states Bruce Owen in “Antitrust and Vertical Integration in ‘New Economy’ Industries” released today by the Technology Policy Institute. According to the author, “Toadying to uninformed populist fears of vertical integration between network providers and content creators by imposing investment-dampening ex ante regulatory constraints is likely to be far less useful to the public than steps to ensure effective competition among network providers.” Instead, he suggests ex post antitrust enforcement could address specific market abuses. The paper is a preliminary version prepared for the recent TPI event, “Antitrust and the Dynamics of Competition in High-Tech Industries.”

In the paper, Owen, Professor of Public Policy at Stanford University and Senior Fellow at Stanford Institute for Economic Policy Research, shows that vertical integration is an inherent feature of all firms. Stages of the production process are performed internally (within a firm) or externally (e.g., by contracts between firms) depending on which is more efficient. Therefore, most vertical integration or disintegration reduces costs or otherwise enhances consumer welfare because it “is a common remedy for market failure or disequilibrium, as well as a natural outcome of competition among organizational forms for economic advantage,” he explains. “Thus, there is no basis for any a priori assumption that vertical integration is welfare-reducing.”

Owen states there is also limited evidence that vertical integration is harmful, even when a firm has market power. “While there is no shortage of theoretical models in which vertical integration may be harmful, most such models have restrictive assumptions and ambiguous welfare predictions-even when market power is assumed to be present. Empirical evidence that vertical integration or vertical restraints are harmful is weak, compared to evidence that vertical integration is beneficial – again, even in cases where market power appears to be present.” Although there are limited circumstances where increased vertical integration could harm consumer welfare, these circumstances are not conclusive predictors of adverse effects.

The author points to two current issues to illustrate the possible negative effects of pre-emptive regulation:

  • Owen states that the FCC’s network neutrality initiative would signal the investment community that “nothing done by a regulator can be taken as given,” creating market uncertainty with no identified consumer benefit.
  • With respect to the Comcast-NBCU deal, Owen is critical of the FCC’s general opposition to vertical integration between content suppliers and distributors. He suggests that “vertical integration has the potential to increase welfare by various means,” and that “multi-channel video distribution and Internet access is no longer a monopoly of cable systems.”

“Antitrust and Vertical Integration in ‘New Economy’ Industries” is available on the TPI website.

The Technology Policy Institute

The Technology Policy Institute is a research and educational organization that focuses on the economics of innovation, technological change, and related regulation in the United States and around the world. More information is available at https://techpolicyinstitute.org/

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