The Role of Competition Analysis in Regulatory Decisions
AEI-Brookings Joint Center Event
About This Event

Washington has many agencies with specialized jurisdiction over particular markets or issues. Competition is important and desirable in all of these markets. Economic theory, backed by numerous studies, predicts that increased competition and the ensuing market forces work best for meeting consumer needs. Regulatory agencies differ, however, in the extent Listen to Audio

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to which they actually factor competition into their decisions. This workshop will explore and evaluate practical policy tools that are available to regulators for fostering competition.

8:30 a.m.
Registration and Continental Breakfast
Robert Hahn, Joint Center
Deborah Platt Majoras, FTC
Panel I: How Can Agencies Foster Competition in Their Industries?
Paul Atkins, SEC
Sean Ennis, OECD
Daniel Meron, Department of Health & Human Services
Charles Nottingham, Surface Transportation Board
Panel II: Identifying Abuses of the Regulatory Process by Firms That Wish to Harm Their Competitors
Marc Kesselman, USDA
Brian Mannix, EPA
Jeffrey Rosen, OMB
Todd Zywicki, GMU
12:30 p.m.
Thomas O. Barnett, DOJ
Panel III: Where Should We Go from Here?
Dennis Carlton, DOJ
William Kovacic, FTC
Timothy Muris, GMU
Robert Pitofsky, Arnold & Porter LLP
Event Summary

May 2007

The Role of Competition Analysis in Regulatory Decisions


Washington has many agencies with specialized jurisdiction over particular markets or issues. Competition is important and desirable in all of these markets. Economic theory, backed by numerous studies, predicts that increased competition and the ensuing market forces work best for meeting consumer needs. Regulatory agencies differ, however, in the extent to which they actually factor competition into their decisions. This workshop explored and evaluated practical policy tools that are available to regulators for fostering competition.

Opening Remarks

The Honorable Deborah Platt Majoras
Federal Trade Commission

The Federal Trade Commission (FTC) promotes competition in a variety of ways. The importance of its role is highlighted by recent empirical work on drivers of productivity and growth. While capital stock, labor, and education are all important for productivity, none is as important as a strong competitive culture. The United States early on adopted the view that "consumer is king," and this view is realized by facilitating competition. Along with the Department of Justice (DoJ) at the federal level and competition agencies at the state level, the FTC is charged with ensuring that competition is alive and well.

One function of the FTC is competition advocacy. It is critical that sound competitive principles infuse decision making throughout federal, state, and local governments. The FTC trains decision-making agencies to foster competition. This service is necessary, as agencies face pressure from interest groups, who often dress their protection-seeking pleas with reference to consumer interest. The FTC advocates competition-enhancing policies through an analytical framework that considers carefully the questions: What specific harm to consumers is the barrier designed to address? Is the proposed restriction appropriately tailored? Does the consumer harm sought to be prevented exceed the cost?

Second, the FTC fosters competition through the analysis and research it produces. The FTC's studies on the oil and gasoline industries, for example, have been influential. A third way the FTC encourages competition is by increasing the transparency of its own decision making. The FTC issues enforcement guidelines that, while not legally binding, assist firms and judges in understanding and abiding by the law.

Panel I: How Can Agencies Seek to Foster Competition in Their Industries?

The Honorable Charles Nottingham
Surface Transportation Board

The Surface Transportation Board is the successor agency to the old Interstate Commerce Commission. Its primary function is to regulate the freight rail industry. The agency is directed to allow to the maximum extent possible competition to establish reasonable rates and to minimize need for federal regulatory control. To accomplish this goal, the agency has jurisdiction over merger reviews, which it evaluates by cost-benefit analyses. The agency also has the power to direct service and sales, and to repeal existing ill-advised or outdated regulation. The agency's oversight and various deregulatory measures have increased competition and lowered rates. Recently, it seems that rates have bottomed out, which may be a sign that the competitive equilibrium has been achieved.

The Honorable Paul S. Atkins
Securities and Exchange Commission

The Securities and Exchange Commission (SEC) regulates the investment sector with an eye toward fostering competition. It conducts competition analysis before promulgating rules. This analysis considers the anticompetitive effects of high regulatory costs, such as those associated with the kind of complex regulation that requires much legal expertise in order to be understood and complied with. Such costs may inhibit competition by excluding small firms from the industry. The SEC is also streamlining the process for approval of new products, further encouraging innovation and competition. Competition--and thus more choices--benefits investors.

Daniel Meron
Department of Health and Human Services

Health-care costs are rising to unsustainable levels. Therefore, the health care industry stands to benefit greatly from increased competition. Heretofore, competition has failed to work in the health-care market because consumers are not well-informed about the total cost of care or about the variations in quality among service providers. For example, consumers have little sense of whether one hospital is better than another at a given procedure, and often only pay a co-payment specified by their insurance policy, regardless of the total hospital bill. To increase competition, the Department of Health and Human Services is producing user-friendly information on the quality and costs of procedures at various locations and encouraging private insurers to do the same. This will force hospitals to compete with each other on quality and price.

Sean Ennis
Organisation for Economic Co-operation and Development

The benefits of increased competition have been especially apparent in the overhaul of the U.S. transportation sector. In an effort to replicate these benefits across some sectors of the economies of various countries, the Organisation for Economic Co-operation and Development (OECD) has developed a "competition framework." This framework was written with government officials and non-economist regulators in mind. It outlines simple general principles of pro-competitive behavior and provides an evaluative tool that assesses the degree of competition a given rule facilitates. Use of this OECD toolkit is a good first step toward promoting more competitive regulatory policies in the OECD's thirty member countries.

Panel II: Identifying Abuses of the Regulatory Process by Firms that Wish to Harm Their Competitors

Jeffrey Rosen
Office of Management and Budget

Most regulations have an impact on competition. To discern whether a particular regulation is an anticompetitive abuse of the process is difficult. Some regulation processes are initiated through the request of a private party, while others are initiated by the government. Either way, a regulation is likely to affect competitiveness in the regulated market. To determine whether there is some abuse, regulators should take seriously the comments given in the public comment period in order to determine the true motive and likely effects of the rule in question.

Marc Kesselman
Department of Agriculture

There are two sides to every regulatory process, which makes determining whether a firm is abusing the regulatory process difficult. Accordingly, the standard of validity for the regulatory process should be whether the proper process takes place. For example, incumbent tomato farmers might have opposed the introduction of the new, flavorful--but misshapen--strain of tomatoes called "Ugly Ripe Tomatoes" out of genuine concern for industry standards, or simply to suppress competition. This is a judgment call that any efficiency analysis will have to make. The best an agency can do to avoid abuses of the regulatory system is to ensure that due process is followed.

Brian Mannix
Environmental Protection Agency

Economic regulation and regulation concerned with antitrust and market power are distinct from social regulation and regulation concerned with health, safety, and the environment. Economic regulators tend to focus on transfers between consumers and producers, while social regulators primarily worry about the net welfare loss. During the "golden era of deregulation" of the transportation and finance industries in the 1970s, social regulation was increasing. This is further evidence that the two activities are conceptually distinct.

Todd Zywicki
George Mason University Law School

Much attention has been given to the difficult cases of anticompetitive barriers erected by regulation, but easy cases represent a huge portion of these anticompetitive regulations. Many of these easy cases occur where there are political market failures. These include situations where there are concentrated benefits and dispersed costs, or homogenous interest groups competing with a very heterogeneous group of consumers. Benefit analysis is a useful way to determine whether a given regulation is merely anticompetitive or in fact has real benefits. While courts are adept at updating antitrust laws, they are not so adept at looking beyond facile defenses of regulations in the name of consumer protection and toward conducting cost-benefit analyses.

Keynote Address

The Honorable Thomas Barnett
Department of Justice

Free and open competition generally leads to lower prices, increased quality, and more selection for consumers. DoJ should try to minimize interventions in the economy. Congress should not replace free-market competition without clear analysis suggesting that intervention will promote social welfare. Regulation should be issued carefully and cautiously, as even simple tasks can become difficult to accomplish in a regulatory environment. The deregulation of certain industries has provided significant consumer benefits.

This is not to say there is no place for regulation, but rather that regulation should be undertaken with a precise purpose in mind. What conditions will the regulation correct? Classic conditions for regulation include instances of natural monopolies as well as instances where there are information problems. Even in such cases, we should challenge our assumptions. For example, while electricity transmission is a natural monopoly, electricity generation is not. Regulating the entire electricity industry, as was done for many years, rather than just the part that would incur a market failure, inhibited competition and ultimately harmed consumers.

The Antitrust Division of the DoJ is an enforcement, not regulatory, agency. Accordingly, the division does not ask whether the market is organized as efficiently as possible. Instead, it looks for violations of antitrust policy and advocates competition. Even under a regulatory regime, pro-competitive, market-based principles can be applied. Examples of the division's success in facilitating deregulation, fostering competition, and improving consumer welfare abound.

Panel III: Where Should We Go from Here?

Dennis Carlton
Department of Justice; University of Chicago

The public interest standard for decisions of when and how to regulate is problematic for political reasons. We should not tie regulators to this standard; the range of activities under the purview of regulators should be limited by fiat. This is because people--regulators included--are generally unwilling to delegate power away from themselves. The vagueness of the public interest standard could allow regulators to justify regulation that supports their own interests, rather than those of the public. The workaround is to regulate as few activities as possible and to rely more heavily on antitrust laws.

Regulated industries should be scrutinized carefully and regularly. Changes in industry structure and technology over time can render once-advisable regulations ineffective and counterproductive.

The Honorable William Kovacic
Federal Trade Commission

The regulatory process could benefit much from investing more in the intellectual capital that informs judgments about the effects of regulatory policies and from networking across various regulatory agencies. Good work in regulation requires careful empirical research. Without this research, the regulating agency lacks the power to demonstrate the benefits of pro-competitive policies. Additionally, the working knowledge base could be expanded by improving collaboration among regulators of different industries and at various levels. All regulators share commons concerns and can benefit by learning from each other.

Timothy Muris
George Mason University

It is preferable to work through antitrust laws rather than other regulatory agencies because antitrust has a market-based, pro-competitive orientation. Indeed, all regulatory policies should be based on sound, pro-competitive economic principles. A case study that demonstrates the value of this focus is in patent policy. The FTC issued a report showing that courts were over-zealous about the enforcement of patent rights to the detriment of competition and innovation. This report encouraged patent policy reform.

Robert Pitofsky
Arnold & Porter; Georgetown University Law Center

An important question is how pro-competitive concerns balance noncompetitive concerns. For example, concerning the issue of media concentration, how should worries about competition balance concerns about First Amendment rights? For many issues, purely economic considerations are insufficient. This highlights why agencies must understand the importance of competition principles. Each agency should have an official whose primary focus is competition. Additionally, agencies should interact regularly with pro-competition agencies such as the FTC and DoJ.

Joint Center research assistant David Burk prepared this summary.

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