The reaction from netizens was swift and fierce: Chairman Wheeler’s proposal to permit paid prioritization on the Internet—with an offer to stamp out discriminatory conduct on a case-by-case basis—was considered a betrayal of President Obama’s net-neutrality pledge. Protesters gathered in front of the Federal Communications Commission (FCC), and petitions made the rounds on Twitter.
The grassroots campaign for reclassifying Internet services from “information” to “telecommunications” served its purpose: The Chairman has essentially changed his position and has put the agency on the path to embracing a more invasive “Title II” approach. In economic terms, this means that the regulator could establish a “zero price” for paid prioritization. And when its price goes to zero, priority delivery will cease to exist.
This is not the agency’s first attempt to regulate paid prioritization out of existence. In a recent decision to toss the FCC’s original Open Internet rules, the D.C. Circuit said that interfering with market negotiations by setting a zero price amounted to “common carriage” regulation, which was legal only if the FCC reclassified Internet service (and then established a regulated rate of zero).
The Court also articulated a less-invasive path for regulating such arrangements, in which Internet service providers (ISPs) and content providers could voluntarily negotiate the terms for priority delivery. The FCC could serve as a backstop to adjudicate disputes if negotiations broke down and discrimination was to blame. Importantly, the Court signaled that the FCC could invoke this alternative approach under its existing (section 706) authority without reclassifying ISPs.
How should the FCC choose between these two alternatives? Economic efficiency dictates that the regulator should select the least restrictive remedy that addresses the potential harm—that is, select the most targeted protection against the potential that ISPs could favor certain content providers over others in paid-prioritization offerings.
This least-restrictive principle is sorely missing from the current version of the net neutrality debate. Perhaps it is overlooked because it is so simple, or perhaps it’s being studiously ignored because Title II proponents (led by a handful of law school professors) don’t think like economists. But even lawyers understand that if two remedies equally mitigate a potential harm, and if the first uniquely introduces a new risk, the second is clearly preferred.
To drive home this least-restrictive principle, consider a simple analogy in your kitchen. There is small chance of starting a fire when preparing dinner for the kids. To protect against that harm, you can adopt one of two remedies: Purchase a fire extinguisher from your neighborhood hardware store, or install a fire hydrant equipped with a fire hose from a contractor.
There is no doubt that both remedies will put out a fire. Aside from offending aesthetic sensibilities, the fire-hydrant solution opens up the possibility that your toddler will flood the kitchen. Because the extinguisher gets the job done, and because there is zero risk of ancillary harm, you head to Home Depot.
To further drive home this principle, consider how the Department of Justice selects among possible remedies when reviewing a merger. According to its Policy Guidelines to Merger Remedies, the Antitrust Division looks for a surgical strike:
A remedy carefully tailored to the competitive harm is the best way to ensure effective relief. Before the Division will conclude that a proposed remedy is acceptable, the relief must effectively address each of the Division’s competitive concerns. There should be a close, logical nexus between the proposed remedy and the alleged violation—and the remedy should fit the violation and flow from the theory or theories of competitive harm. Effective remedies preserve the efficiencies created by a merger, to the extent possible, without compromising the benefits that result from maintaining competitive markets.
In other words, when choosing among remedies to address a potential competitive harm, don’t toss out the good with the bad.
Unfortunately, the least-restrictive principle is completely ignored by Title II proponents, who seek to prohibit an entire category of business agreements that could be abused. They are not sensitive to the possibility that some of these priority-delivery arrangements may actually be good for consumers and both parties to the transaction, while leaving no other parties worse off. And they are not sensitive to the possibility that, once reclassified, the agency could impose other common-carriage obligations on ISPs—for example, regulating broadband access prices—in a way that undermines their incentive to invest. Is it any wonder why 28 Internet CEOs just issued a letter saying that Title II regulation could threaten their business plans?
By the same logic, Title II proponents would counsel you to install a fire hydrant (with matching hose) in your kitchen. Damn the aesthetics and don’t worry about the floods (or horrible water pressure in your very cool, new soaker shower). Problem is that these folks are not thinking like good economists.
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