Senate Testimony of J. Gregory Sidak on Network Neutrality Regulation

Proponents of network neutrality regulation have ignored the essential cost and demand characteristics of telecommunications networks. Few industries studied by economists have received such intensive theoretical and empirical analysis as telecommunications. Today, regulators understand very well how the unique cost characteristics and demand characteristics of telecommunications networks affect market outcomes and the efficacy of regulatory intervention. Network neutrality obligations are incompatible with what we know about the economics of telecommunications. To understand the harm that such regulation would pose to economic welfare, Congress needs to appreciate six salient economic features of telecommunications networks: sunk investment, economies of scale, common costs (economies of scope), differential pricing (Ramsey pricing), joint demand (two-sided markets), and congestion. These six economic considerations underscore why Congress should not frustrate the ability of a telecommunications network operator to recover the sunk costs of its broadband network in the manner that least distorts consumer choices. The enactment of network neutrality obligations would reduce consumer welfare by forcing end users to pay more for broadband Internet access or to forgo the service. At the same time, such obligations would not produce benefits in terms of preventing anticompetitive behavior: A telecommunications carrier already lacks the incentive to block a consumer's access to lawful content, because content and carriage are complementary goods, not substitute goods. A telecommunications carrier also lacks the incentive to degrade the quality of packets for VoIP services, because that degradation would be quickly detected and could trigger litigation. Finally, the overarching reason why anticompetitive behavior of any sort is implausible is that competition will constrain the market power of any given carrier. In most geographic markets, four or more separate firms will supply broadband Internet access. Congress faces many important questions as it revises the Communications Act, but the imposition of "net neutrality" obligations is not one of them