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Regulation - What is it Good For?

Regulatory Capture

Regulatory capture is an economic principle that describes a situation where regulatory agencies are dominated by the industries they are supposed to be regulating. Economic theory predicts that regulators caught by regulatory capture act in ways that protect incumbent providers instead of the public interest. Unfortunately, the broadband industry is one of the best (or worst) examples of regulatory capture.

Economic theory says that it’s necessary to regulate any industry where a handful of large players control the market. Good regulation is not supposed to be antagonistic to large corporations but should strike a balance between what’s good for the industry and what’s good for the public. In a perfectly regulated industry, both the industry and the public should be miffed at regulators for not fully supporting their issues.

The concept of regulatory capture was proposed in the 1970s by George Stigler, a Nobel prize-winning economist. He described the characteristics of regulatory capture as follows. His list matches what’s happening in the broadband industry to a tee.

  • Regulated industries devote a large budget to influence regulators at the federal, state, and local levels. It’s typical that citizens don’t have the wherewithal to effectively lobby the public’s side of issues.
  • Regulators tend to come from the regulated industry, and they tend to take advantage of the revolving door to return to industry at the end of their stint as a regulator.
  • Regulation from the legislative process tends to become corrupt, such as when politicians vote for bills they don’t understand in return for contributions. Actual regulators can also be corrupt – but often regulators side with the industry over the public because they have an industry perspective.
  • In the extreme case of regulatory capture, the incumbents are deregulated from any onerous regulations while new market entrants have hoops to jump through.

There are many examples throughout history of economic cartels that successfully captured regulators. For example, the railroads in the 19th century ran roughshod over the economy and regulators. Unfortunately, the best current example of regulatory capture is the broadband industry, perhaps closely followed by big agriculture and big pharmaceuticals. There is no question that the power of the broadband industry is concentrated among only a few firms. Comcast, Charter, AT&T, and Verizon together serve 75% of all broadband customers in the country.

The FCC is a textbook example of a captured regulator. The FCC under Ajit Pai went so far as to deregulate broadband and to wash the FCC’s hands of broadband as much as possible by theoretically passing the little remaining regulation to the FTC. It’s hard to imagine an FCC more under the sway of the broadband industry than the last one.

But federal regulators are only the tip of the iceberg. The large ISPs have convinced most state regulators to deregulate (or never regulate) broadband. The ISPs spend an immense amount of money in state legislatures trying to get laws passed that favor the big ISPs or that disfavor any potential competitors. The surest sign of regulatory capture is that the big ISPs are also active at the local level and pressure City and County Councils to not consider local broadband projects. There is an immense lobbying effort currently underway to dissuade local politicians from using ARPA grant money for broadband.

We don’t have to look far to see how the industry has gotten its way with regulators. The U.S. has some of the most expensive broadband in the world. Tens of millions of homes have little or no broadband. The broadband industry has the worst overall customer service among all industries- and that’s saying something. The big ISPs abuse customers in other ways such as quietly monetizing customers’ private data.

There is no real fix for regulatory capture other than a loud public outcry that brings back strong regulations. That can start at the FCC, but even that isn’t going to put a dent in the influence of the ISPs at the state and local level.

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