Wireless competition is good for consumers–even if it costs taxpayers extra

November 13, 2013

(Photo by Raymond Shobe)

The Federal Communications Commission, under the leadership of freshly-confirmed chairman Tom Wheeler, is hard at work on rules that will govern next year's spectrum auction. AT&T and Verizon, the nation's largest wireless carriers, want the commission to hold an unrestricted auction that could allow them to maintain or even widen their lead in premium low-frequency spectrum. Their smaller competitors, especially T-Mobile, are urging the commission to adopt rules to guarantee that the largest carriers do not wind up with a disproportionate share of that spectrum.

In recent filings and press statements, AT&T has emphasized that limiting its participation in the auction could cost taxpayers money—a lot of it. An AT&T-commissioned study has estimated that limiting participation in the auction could cost the U.S. Treasury billions or even tens of billions of dollars.

It stands to reason that restricting participation in the auction would lead to lower revenues. But that doesn't necessarily mean the restrictions are a bad idea. To the contrary, the benefits to consumers from a more competitive wireless market may dwarf the lost auction revenue.

This is not a new dilemma. Centuries ago, it was common for European monarchs to raise revenue by selling monopolies over soap, playing cards, and other common goods. If someone had advocated the abolition of these monopolies, a 16th-century economist could have correctly pointed out that doing so would cost the royal treasury a lot of money. But that wasn't necessarily an argument for keeping the monopolies in place, because they cost consumers a lot more than the value they created for the royal treasury.

Obviously, the wireless industry isn't a monopoly. But the same basic principle applies. If AT&T and Verizon are willing to pay a premium for spectrum, it may simply be because they have the most to lose from a more competitive market. In other words, their primary goal might not be to expand their own networks so much as to prevent anyone else from expanding theirs. And if that's true, then the higher revenues from an unrestricted auction would effectively be a tax on future wireless customers, just as royal monopolies were a tax on 16th century consumers.

Of course, AT&T and Verizon deny that their goals are anti-competitive. They argue that Sprint and T-Mobile already have plenty of spectrum to compete effectively, and that they're using spurious arguments about competition to get spectrum at cut-rate prices. And there are other reasons policymakers might not want to place too many restrictions on entry into the auction. For example, the auction could fail if it doesn't generate enough revenue to satisfy broadcasters who are using the spectrum now.

But the mere fact that a restricted auction would generate less cash than an unrestricted one doesn't tell us much about whether it's a good idea or not. Selling monopolies has always been one way for governments to raise money. But it's almost never a good one.

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Timothy B. Lee · November 13, 2013