Antitrust via Rulemaking: Competition Catalysts

Some observers note a decline in competition in American industry; fewer new firms are entering the market, and markets are becoming more concentrated. Federal and state agencies can devise regulations to catalyze competition. Federal and state agencies can use different types of rules to spur competition, including deregulation, which removes rules that discourage new firms, or switching price rules, which makes it easier for consumers to try a new service provider (such as the rule that phone customers can keep their phone number when changing service providers).

For most of the twentieth century, competition was regulated either by antitrust law, or by public utility regulation. Economist Fred Khan observed that some regulation, such as regulation of airlines and trucking, actually prevents competition. The Federal Communications Commission (FCC) and other agencies began to design rules to promote competition in communications markets.

The FCC’s Carterphone rules encouraged competition, allowing customers to connect telephones made by the phone company’s competitors, fax machines, answering machines, and modems to the phone network. The best pro-competitive rules make it easier for new firms to enter the market, and to allow the creation of entirely new industries; in designing new rules, policymakers should recognize that dominant firms will make efforts to defeat the rules. Some “separation” rules promote competition by preventing firms from selling goods in a bundle; these rules work best when there is a “clean cut” between two services, such as the rule that eye exams must be offered separately from contact lenses. Deregulation does not work if only part of the market is deregulated; for example, California energy markets were partly deregulated, resulting in price manipulation and shortages. Common carrier rules foster competition by levelling the playing field between different competitors; one oil company cannot get an edge on competitors by cutting a special deal with transportation firms; net neutrality rules are similar.