Real consumer protection

Many people subscribe to the notion that, however flawed big government might be, it remains necessary to the protection of citizens against corporate interests. In effect, big government is needed to counteract big business. As I have argued before, however, the best defense against big business is the free market, as there is no inherent conflict between large corporate interests and government. What businesses truly despise is not government, but unrestrained competition. Indeed, government presents a tool for corporations to use to their own ends.

It's with this in mind that I note the following post from the Surprisingly Free blog on competition in the cell phone industry:

Adjusted for inflation, average revenue per minute [in the wireless industry] fell by 87 percent between 1997 and 2007, and average voice revenue per minute fell by 90 percent. Just during the last five years, inflation-adjusted average revenue per minute fell by 53 percent, and average voice revenue per minute fell by 61 percent.

Could regulation improve on these outcomes? In our comments to the FCC, Jerry Brito and I offer a little thought experiment. Suppose the wireless industry were subject to enlightened, highly efficient, and perfectly operating price regulation. Specifically, suppose the FCC had mandated a version of “incentive” regulation that allowed the wireless companies to increase their prices by no more than the rate of increase in the consumer price index minus an annual 7 percent offset to reflect increased productivity. (Seven percent is the highest productivity offset we’ve seen any telecommuncations regulator in the U.S. use in any context.) Would this be better or worse than what the market actually produced?

This graph shows the answer. If wireless had been subject to incentive regulation, even a 7 percent productivity offset would have reduced wireless revenue per minute by only 36 percent since 1997 and by 19 percent since 2002. In other words, the lightly regulated wireless market produced price reductions nearly 2.5 times as large as those that could have been expected under severe, highly efficient, perfectly operating regulation. And these results measure only the price effects, not the explosion of innovation that accompanied the price reductions.

Would the results have been even better if more spectrum were available for wireless services? Probably. But beyond that step, it’s doubtful that regulators could have done much else to improve on the 90 percent price reduction we’ve seen in the past decade.

Even imperfect competition in the cell phone industry -- with its high barriers to entry -- still produces results superior to that which could be expected from regulation. Consumers truly have few better friends than the free market.