Free markets: the economic and technical arguments for strong net neutrality

The modern anti-competition potential of the Internet Service Provider is nuclear. Far from merely an industry-siloed cartel, they control both the products and the means of discovery.

Today the FCC voted to overturn Obama-era policy that prevented Internet Service Providers from blocking or slowing access to certain web content. Chairman Ajit Pai, who spearheaded the successful campaign, argued that the repealed rules stifled competition and represented government interference in the otherwise free market. “The internet wasn’t broken in 2015. We weren’t living in a digital dystopia. To the contrary, the internet is perhaps the one thing in American society we can all agree has been a stunning success.”

Ajit Pai’s official FCC photograph

This article will describe some of the economic principles of a free market, principles which ensure fair trade and competition. Using these principles, I will show how recent technical development makes the repeal of net neutrality exploitable in novel ways. Finally, I will offer several academic sources which demonstrate the efficacy and reality of such exploitation.

I. Economic principles of a free market

"Free market" is an idealized system which is the opposite of a "regulated market" system. In a free market, the price of goods and services are set by natural forces of supply and demand. A regulated system allows for government intervention, e.g. the police enforce the price of food and punish buyers/sellers who stray from the established limit. 

To be clear, free markets don't really exist except abstractly - they are a concept which motivates trade policy and helps inform the way we conduct our commerce.

Free market ideologies have clear benefits. Price-fixing, or the act of government control over prices, perpetuated the Great Depression. Although American agriculture produced plentiful food, citizens starved because prices were inflexible. Freedom of competition has been shown to lead to greater innovation and healthier economies.

But the free market is not without its failings. Adam Smith, the father figure of free markets freely recognized its pitfalls in his magnum opus, The Wealth of Nations, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

In other words, Smith recognized that businesses have every incentive to conspire against common people. For example, Standard Oil was an American oil company which established an illegal monopoly over the oil industry by undercutting competitors and controlling all available product. Their vicegrip on the oil industry meant that Americans could not purchase crucial fuel except at extortionate prices. Modern-day examples include OPEC (oil cartel) and De Beers (a diamond cartel).

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” – Adam Smith, 1776

Proponents of a free market will rarely argue for monopolies or other anti-competitive behaviors. Called corporatism or crony capitalism, such market systems rarely exist except under oligarchies where a few wealthy individuals control political power. No, these free market proponents recognize that some government interference is necessary for the healthy continuance of an economy. And so federal agencies like the Federal Communications Commission, Food and Drug Administration, and Federal Reserve System regularly interfere in an otherwise free market to help protect consumers against illegal behaviors.

II. Exploitation and net neutrality

This brings us to the market economy of telecommunications. We would clearly be upset if a similar monopoly existed to control our Internet today. Imagine a sudden buyout of your Internet Service Provider suddenly placed you under the watchful care of Standard Communications. Not only did they control your home Internet connection, but also provided your phone’s data plan and business line. Given that they had bought out the competition, you would have no choice but to go through Standard Communications to access your favorite social media sites and cat videos. Your Internet connection suddenly becomes so tenuous that cat videos are all but intolerable to view. Disaster. Standard Communications offers a way out, though. For an extra $45/month, you can return to your previous speeds. You fork out the cash, knowing full well that this cycle will repeat itself in a few months.

But this is not the doomsday scenario that the net neutrality proponents are suggesting will happen. Thankfully, anti-trust legislation still makes this illegal. Well…mostly.

Because of the high cost of telecommunications infrastructure, chances are you only have one or two options for your Internet service at home. Not anti-competitive, but certainly far from a thriving market benefiting the consumer. This makes replacing your current Internet plan annoying, yet not impossible.

Here’s where Internet monopolies are different than others. As horrible as it would be to restrict access to fuel, food, or medicine, a telecommunications company controls your access to nearly everything.

Let’s return to the Standard Communications example. Consider for a moment which social media site, sports page, or online news source is your favorite. These sites earn money either through selling you goods/services or by showing you advertisements, which marketers pay them to display. If you do not visit these sites, these businesses cannot earn money. One day, you discover that your cat videos are running dreadfully slow on YouTube. Thankfully, other video sites aren’t running as slowly and you can watch cat videos there, albeit with a diminished selection for content. If the problems continue for long enough, it is likely that you will no longer visit YouTube and they will go out of business.

Figure from a 2012 ACM paper shows that users with a normally fast Internet rate abandon a slow-loading video much more quickly than those on slow connections. source; Video Stream Quality Impacts Viewer Behavior, by Krishnan and Sitaraman, ACM Internet Measurement Conference, Nov 2012

Here, proponents of repealing Net Neutrality will take issue. Surely such willful hijacking of your content wouldn’t benefit Internet Service Providers. After all, Comcast does not compete with cat videos or Facebook. They simply wish to stratify their services so that they can offer an improved experience to certain platforms, such as providing innovative services on a faster connection.

Until recently, this was mostly true. The modern shift to the Internet as a marketplace of the commons was a monumental change to our economy. Sites like Craigslist killed off newspaper sell-buy ads seemingly overnight. Amazon supplanted all brick-and-mortar establishments in less than 20 years. Nowadays, it’s difficult to conduct business at large scale without the Internet. Even as recently as 2007, that was hardly the case. But when the Blackberry and iPhone federalized mobile Internet access, it suddenly became impossible for the wide berth of the market to discover you with it.

The modern anti-competition potential of the Internet Service Provider is nuclear. Far from merely an industry-siloed cartel, they control both the products and the means of discovery. Standard Communications could launch its own video service and kill YouTube overnight. They could chose which news sites you get to visit and which companies get to advertise to you. Because of this, they not only represent an affront to free markets, but also to free speech.

III. Academic Research

  1. Researchers at Stony Brook and Northeastern University uncovered how T-Mobile and other Internet companies deliberately slowed the video-streaming speed of competitors in order to favor their own partnered services: David Choffnes of Northeastern University showed how T-Mobile slowed YouTube videos to encourage its users to watch their partner’s content (Netflix). T-Mobile did this by inspecting individual data packets and delaying the transmission of targeted competitors. This would be similar to the United States Postal Service opening your letters and reading their contents, prioritizing delivery if you recommended Netflix to your friends and disposing of your letter if you recommended a different service. One troubling take from this research is that it encourages the breakdown of trust relations on the web, providing YouTube with an incentive to disguise its packets. This would make legitimate traffic harder to distinguish from unwanted spam.
  2. A Data Scientist discovered that pro-repeal advocates falsified hundreds of thousands of comments in a misinformation campaign designed to justify the FCCs decision: Jeff Kao, a data scientist, demonstrated the techniques used to conduct ‘astroturfing’ which is a faked grassroots campaign. The New York Attorney General’s office independently reached the same conclusion after investigating claims of identify theft used to perpetrate the conspiracy. Kao’s techniques revealed trends which could not have been organically produced. This campaign provides an evidence to the earlier claim of ISPs representing an affront to freedom of speech.
  3. Researchers from the University of California – Irvine wrote about the economics of existing services and newly entrant competing services: A joint publication between the economics and computer science departments, the writers showed how expensive services would become in a partnered (duopoly/QoS) system using accepted market models. The implications of their work were such that newly entrant competitors would be unable to find a niche market under Hotelling’s Law and the duopoly standard.

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