Net Neutrality Strengthens Monopolies, Invites Corruption

When it imposed its net neutrality rules on the telecom industry, the FCC was fixing a problem that didn’t exist.

While proponents of Net Neutrality have long claimed that the regulations are necessary to impose fairness for Internet usage, access to the Internet has only become more widespread and service today is far faster for users—including “ordinary” people—than it was twenty years ago.

Nevertheless, when the FCC in recent months—now under pressure from the Trump Administration—announced that it may step back from net neutrality, supporters immediately began claiming that net neutrality was necessary to keep Internet access affordable and “fair.”

In truth, net neutrality has never fostered fairness or better access for consumers, and has instead created conditions that will encourage less competition and more monopolistic power for large firms within the industry.

Instead of relying on the marketplace to allocate goods, net neutrality ensures that politics will determine who gets what, instead. This is hardly a recipe for fairness or neutrality.

In the marketplace, goods and services tend to be allocated according to those who demand the goods the most. Where demand is highest, prices are highest. In some cases, this will mean that some customers will be able to pay for faster Internet service than others.

But, the existence of some “luxury” types of Internet service do not interfere with the existence of lower-priced services, just as the existence of luxury cars do not prevent the manufacture of economy cars.

It is this market mechanism that drives the marketplaces for food, clothing, and a host of other products. Consequently, both food and clothing have become so plentiful that obesity is a major health problem and people often throw out barely-worn clothing. Similarly, cell phones have only become more affordable and more widespread in recent decades while freeing us from the telephone monopolies of old.

This is all the natural outcome of market competition. In industries where new firms may freely enter, and customers are not compelled to buy, companies or individuals that wish to make money must use their resources in ways that are freely demanded by others. Unless they have been granted monopoly power by government, no firm can simply ignore its customers. If they do, competing firms will enter the marketplace with other goods and services.

But, goods and services need not be allocated by markets. Goods and services can be allocated by political means, instead. That is, governments employing coercive means can seize goods and services and allocate them according to the certain goals of people in positions of political power.

Supporters of net neutrality, however, are claiming that the FCC will somehow necessarily work in the “public” interest and against the special interests who—experience tells us—tend to hold the most influence with regulatory agencies.

In practice, the natural outcome of regulatory schemes like net neutrality is “regulatory capture,” in which the institutions with the most at stake in a regulatory agency’s decisions end up controlling the agencies themselves. We see this all the time in the revolving door between legislators, regulators, and lobbyists. You can also be sure that once this happens, the industry will close itself off to new innovative firms seeking to enter the marketplace. The regulatory agencies will ensure the health of the status quo providers at the cost of new entrepreneurs and new competitors.

Moreover, as Nobel-prize-winning economist Douglass North noted, regulatory regimes do not improve efficiency, but serve the interests of those with political power:

“Institutions are not necessarily or even usually created to be socially efficient; rather they, or at least the formal rules, are created to serve the interests of those with the bargaining power to create new rules.”

Not surprisingly, small, less-powerful internet providers are the most at-risk under net neutrality, with nearly two dozen of them recently asking FCC chairman Ajit Pai to reconsider net neutrality rules that are especially burdensome on small providers.

Smaller companies claim that the regulations have caused them to pull back from expansion plans, and also impact their ability to obtain financing. While larger carriers have their own objections, of course—and will surely send in an army of lobbyists and attorneys to ensure rules and legislation are to their liking—small businesses are more at the mercy of regulatory schemes.

Unlike the few huge firms that dominate the industry, smaller firms can’t afford the long legal battles that come with new regulations, and they must compete more heavily for financing.

The end result will be fewer small firms entering the marketplace, and thus less competition. This in turn will lead to higher prices and fewer choices for customers.

Government regulation has long been an easy way for large firms to drive the smaller competition out of business. Net neutrality is no different.