Thomas Philippon tackles this question in his new book The Great Reversal: How America Gave Up on Free Markets. He’s an economist at NYU who moved to the US in the 1990s but has kept an eye on Europe. The book looks at a lot more than just broadband prices and Philippon looks at other major industries like airlines, pharmaceuticals, and the US food chain.
He says something that was a wake-up call to me. Go back 30-40 years and the situation was reversed. At that time the US had some of the lowest prices in the world for things like telecom, airline tickets, pharmaceuticals, and food – and not just a little cheaper. Prices here were 30-40% lower than in Europe at that time. In just a few decades the situation has completely reversed and US prices from major industries are now much higher than in Europe.
How did this happen? He says the cause is almost entirely due to what he calls corporate concentration. In every one of the industries where prices have climbed in the US, there have been numerous large corporate mergers that have had the net impact of reducing competition. As fewer and fewer giant companies control a market there is less competition. One result of corporate concentration is the ability of industries to squash regulations through corporate lobbying – and lowering regulations inevitably leads to higher profits and higher prices.
It’s not hard to trace the history of consolidation through any of the major industries in this country. Since the readers of the blog are telecom folks, consider the telecom landscape in 1990:
- At that time the Baby Bell companies were still separate from AT&T.
- There was a vigorous CLEC market starting to grow led by companies like MCI.
- There were probably a hundred different medium-sized regional cable companies.
- There were not as many cellular companies due to the limited licenses granted for spectrum, but there was still strong regional competition from smaller cellular companies.
- There were dozens of thriving manufacturers of telecom electronics.
- In 1990 we had vigorous regulation, and at the state level there was still a lot of telecom rate regulation.
In just thirty years that picture changed. Most of the Baby Bells came back together under the AT&T umbrella. Comcast and Charter went on wild buying sprees and consolidated most of the medium-sized cable companies. Telcos purchased and neutered their competition, like the purchase of MCI by Verizon. Comcast and AT&T went on to merge with giant content providers to further consolidate the industry supply chain.
Telecom regulation has been all but killed in the country. This is almost entirely at the bidding of lobbyists. The current FCC went so far as to write themselves out of regulating broadband. All of these events resulted in US broadband that now costs twice as much as the rest of the industrialized world.
Meanwhile, Europe took the opposite approach. In 1990, regulation in Europe was local to each country and concentrated on protecting local industries in each country – and that led to high prices. However, after the creation of the European Union in 1993, regulators adopted the philosophy of promoting competition in every major industry. From that point forward, European regulators made it extremely difficult for competing corporations to merge. Regulators took special care to protect new market entrants to give them a chance to grow and thrive.
The regulatory policies in the US and Europe have completely flipped since 1990. The US was pro-competition in the 90s, as well-evidenced by the Telecommunications Act of 1996. Today’s FCC is working hard to eliminate regulation. European regulators now put competition first when making decisions.
It’s never too late for the US to swing back to being more competitive. However, for now, the monopolies are winning, and it will be hard to break their hold on politicians and regulators. But this is something we’ve seen before. At the turn of the nineteenth century, big corporations had a stranglehold on the US. Monopolies inevitably abuse their market power and eventually there is enough public backlash to push the government to re-regulate industries.