The Frequently Attempted, But Rarely Successful Identification of Causation

           First, thanks to anyone who sees a daunting title like this one and nevertheless reads on. I want to discuss whether and how researchers can correctly isolate variables and determine how impactful they are on consumers, competition, and the marketplace.

           For example, former FCC Chairman Ajit Pai and others claimed in that imposing network neutrality obligations on Internet access providers created a substantial, unassailable adverse effect on carrier investment in infrastructure:

           “So what happened after the Commission adopted Title II? Sure enough, infrastructure investment declined. Among our nation’s 12 largest Internet service providers, domestic broadband capital expenditures decreased by 5.6% percent, or $3.6 billion, between 2014 and 2016, the first two years of the Title II era. This decline is extremely unusual. It is the first time that such investment has declined outside of a recession in the Internet era.” Remarks of FCC Chairman Ajit Pai at the Newseum, “The Future Of Internet Freedom” (Washington, D.C, April 26, 2017); https://transition.fcc.gov/Daily_Releases/Daily_Business/2017/db0426/DOC-344590A1.pdf.

           After relentless repetition of this assertion, it became gospel truth and expanded to become a given that a single major regulatory initiative, by itself, can trigger multi-billion dollar reductions in carrier capital expenditures.

           Never mind that this isolation of a single causal (so-called dependent) variable simplifies a quite complex issue about the many factors directly impacting a carrier’s decision to invest in plant, that may take years to recover, if at all.  Politicians and sponsored researchers like to remove complexity and identify a single cause for all types of ills, particularly ones that possibly constrain profitability of important benefactors, requiring them to work harder. 

           Regulators were presented with “proof” that their work had harmed consumers and the public interest.  Publications, like the Wall Street Journal, showcase the research followed by a strongly worded editorial castigating the FCC for its poor work product.

           Currently, another variable isolation process is underway, this time to prove that mergers and acquisitions enhance consumer welfare and promote competition.  Dr. Tom Hazlett, Hugh H. Macaulay Endowed Professor of Economics, Clemson University, and Dr. Robert Crandall, Senior Fellow, Technology Policy Institute, have written a comprehensive paper concluding that TMobile’s $26 billion acquisition of Sprint in 2020 did not trigger a cascade of anticompetitive outcomes, but in fact achieved great things. See https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4736059 [hereinafter cited as Hazlett and Crandall 2024 Paper].

          The paper supports the premise that reducing the number of U.S. facilities-based wireless carriers from 4 to 3 did not result in a variety of terrible outcomes, predicted by the Justice Department, many state Attorneys General, and yours truly.

          In another blog entry, I may attempt to identify questionable assertions made in the paper which I suspect will get much promotion given the stature of the authors, the persuasive nature of the paper, and the ongoing campaign to shut down any initiative at the Federal Trade Commission and elsewhere to become more aggressive antitrust law enforcers.

          Right now, I would like to identify a curious and probably unanticipated result of the paper: two eminent researchers have provided ample evidence that U.S. wireless carriers always have made the necessary investments in plant to stay competitive, regardless of whether one or more regulatory initiatives might make cost recovery more difficult:

“Increases in total bandwidth and network investment accelerated in the post-merger period. These measured trends – each requiring costly actions by the competing mobile service carriers -- are the reverse of what would occur in the “cozy oligopoly” scenario predicted by opponents of the transaction.” Hazlett and Crandall 2024 Paper at p. 26.

           Simply put, wireless carriers capex invest decision are driven largely by technology cycles, whether a carrier has to invest in next generation network plant and bid billions of dollars for more spectrum to accommodate growing bandwidth demand, or not.  Wireless carrier capex has grown even after the election of President Biden and the resulting Democratic majority of FCC Commissioners starting in January 2021.

           Wireless carriers made extraordinarily high capital investments during the upcycle rollout of 5G technology, despite Covid 19 reductions in revenues and stock values, and temporary declines in average revenue per user. If Chairman Pai was correct, wouldn’t it follow that the carriers would have conserved capital during times when marketplace conditions were pointing to delayed or possibly nonrecoverable capital investment?

           Can we at least agree that there are many factors that determine marketplace outcomes? It appears quite unlikely that one event, no matter how profound, can singularly alter market-driven behavior.

Increasingly Unmeasurable Consumer Welfare When Governments Market Meddle

          Currently, both U.S. presidential candidates tout the benefits of having government intervene in commercial markets.  Former President Trump wants to impose tariffs, up to 20%, on foreign goods deemed below cost, so-called predatory pricing and dumping.  Vice President Harris wants price caps on food to foreclose gouging.

           I am skeptical whenever governments try to manage aspects of a market economy even with noble intentions, such as remedying so-called market failures.  Markets rarely fail.  Consumers and elected officials do not like certain market outcomes and unanticipated manipulations. Consumer/voter sentiment considers a market outcome wrong, unfair, or distorted and candidates for elective office better pay attention and “fight” to make thing right.

           Former President Trump wants to level the competitive playing field in a variety of markets, such as steel, solar panels, clothing, and electric vehicles, by imposing a surcharge he asserts will have to be paid by exporting companies that have achieved a lower cost of doing business advance thanks to government subsidies, cheaper labor, and other distortions. Vice President Harris wants to punish greedy corporations that have achieved high profit margins, no longer justified by higher costs and lower demand occurring during the Covid pandemic.

           Curiously, there is little analysis of what constitutes a government-imposed market intervention that can actually remedy a prior intervention (by another government) that has distorted the marketplace and created new winners and losers.  Price dumping companies acquire market share abroad, based on a price discount made possible by a government benefactor. Losers include U.S. companies without access to a government subsidy and their employees who might lose a well-paying job, and opportunity to realize the American Dream.

           Markets get distorted and lots of stakeholders have both legitimate and opportunistic reasons to complain and “vote their pocketbook.” Anyone unemployed, or no longer able to operate a profitable business, can blame imports and the arrival of illegal aliens willing to work for less pay. Anyone looking at the rising cost of food might believe corporations are gouging, despite the economic gospel that above cost pricing encouraging market entry and enhanced competition.

           It looks like there are lots of fallacies, false assumptions, and wishful thinking in play.  I have devoted a career trying to find the truth in telecommunications markets.  What enormous, distorted reality I have seen. I especially loath the gospel truth that all mergers and acquisitions “enhance competition and consumer welfare,” No one seems obligated by courts and the court of public opinion to explain how the marketplace improves.

           The Chicago School advocates point to lower prices, but often one cannot determine actual cost of doing business.  For example, how can one determine the actual cost of providing wireless broadband, when carriers bundle, “at no additional charge” streaming video.  For an industry with very high initial sunk costs, the cost of providing an additional unit of service approaches zero. Accordingly, consumers have no clue whether an attentional text message is properly priced at 5 cents by a reseller, but bundled in with unlimited voice and data.

           If an economic assertion is touted long enough and loud enough by credible speakers, then it becomes true no matter how illogical and bogus.

           For example, what happens when a market consolidation does not trigger market entry and the assumed increase in competition? In telecommunications there are extremely high barriers to market entry in light of the high sunk investment costs and regulatory decisions that often create a scarcity in a mission critical component such as radio spectrum.

           The Chicago School doctrine that mergers can enhance consumer welfare is based on the premise that a concentrated market will not result in higher prices.  But what is the correct price in a concentrated market?  Vice President Harris has generated much pushback, if not contempt, for her foolish economic thinking. Why have Chicago School mandarins avoided similar disdain when new market entry does not occur, prices exceed any measure of ongoing inflation, and there is ample proof that competitive markets in other countries offer consumers a clearly better value proposition?

           Right now, voters are told that tariffs will not raise product costs, governments can identify and sanction price gouging, and mergers are a wonderful event for consumers.

           Do these gospel truths make sense to you?