University of Pennsylvania Carey Law School Penn Law: Legal Scholarship Repository Faculty Scholarship at Penn Law 2002 Vertical Integration and Media Regulation in the New Economy Christopher S. Yoo University of Pennsylvania Carey Law School Follow this and additional works at: https://scholarship.law.upenn.edu/faculty_scholarship Part of the Antitrust and Trade Regulation Commons, Communications Law Commons, Digital Communications and Networking Commons, Economic Policy Commons, Economic Theory Commons, Internet Law Commons, Law and Economics Commons, Policy Design, Analysis, and Evaluation Commons, Science and Technology Law Commons, and the Science and Technology Policy Commons Repository Citation Yoo, Christopher S., "Vertical Integration and Media Regulation in the New Economy" (2002). Faculty Scholarship at Penn Law. 852. https://scholarship.law.upenn.edu/faculty_scholarship/852 This Article is brought to you for free and open access by Penn Law: Legal Scholarship Repository. It has been accepted for inclusion in Faculty Scholarship at Penn Law by an authorized administrator of Penn Law: Legal Scholarship Repository. For more information, please contact [email protected]. Vertical Integration and Media Regulation in the New Economy Christopher S. Yoo† Recent mergers and academic commentary have placed renewed focus on what has long been one of the central issues in media policy: whether media conglomerates can use vertical integration to harm competition. This Article seeks to move past previous studies, which have explored limited aspects of this issue, and apply the full sweep of modern economic theory to evaluate the regulation of vertical integration in media-related industries. It does so initially by applying the basic static efficiency analyses of vertical integration developed under the Chicago and post-Chicago Schools of antitrust law and economics to three industries: broadcasting, cable television, and cable modem systems. An empirical analysis reveals that the structural preconditions recognized by both Schools as necessary for vertical integration to harm competition do not exist in any of these industries. In addition, the cost structure of these industries suggests that vertical integration may well lead to efficiencies sufficient to justify allowing such integration to occur. A dynamic efficiency analysis provides additional reasons for believing that attempts to regulate vertical integration in these industries are misguided. Growing reliance on compelled access to redress the problems purportedly caused by vertical integration threatens to dampen investment incentives in technologically dynamic industries in which such incentives are particularly important. Not only does forcing a monopolist to share an input deviate from the system of well-defined property rights needed to promote efficient levels of investment, it also deprives new entrants seeking to compete directly with the supposed monopoly bottleneck of their natural strategic partners. The Article also engages a complex web of arguments involving the extent to which technological innovation is affected by market concentration, standardization, and network externalities. A close review of the economic literature reveals † Assistant Professor of Law, Vanderbilt University Law School. This Article benefited immensely from a workshop conducted while I was serving as a Fellow for the Center for Communications Law and Policy at the University of Southern California Law School, as well as a workshop at the 2000 Annual Meeting of the Southeastern Association of American Law Schools. I would also like to thank Ash Bhagwat, Tim Brennan, Andy Daughety, Paul Edelman, Luke Froeb, John Goldberg, Ron Krotoszynski, Mark Lemley, Ed McCaffrey, Bob Rasmussen, Jennifer Reinganum, Jim Speta, Matt Spitzer, Eric Talley, Randall Thomas, Bob Thompson, Mark Weinstein, and Phil Weiser for their helpful comments on earlier drafts of this Article, as well as Rob Mahini, Rob Schmoll, and Paul Werner for their expert research assistance. I should also disclose that I served as a law clerk for the courts that decided State Oil Co. v. Khan, 522 U.S. 3 (1997), and Time Warner Entertainment Co. v. FCC, 93 F.3d 957 (D.C. Cir. 1996). The views contained in this Article are my own, as are any errors. Copyright © 2002 Yale Journal on Regulation Yale Journal on Regulation Vol. 19:171, 2002 that the relationship between these factors is too ambiguous to support the type of simple policy inference needed to prohibit vertical integration as a regulatory matter. The Article concludes with an analysis of the intellectual and institutional obstacles for adopting a more integrated economic approach to vertical integration in these industries. Introduction .............................................................................................174 I. The Chain Broadcasting Rules and the Basic Economics of Vertical Integration..........................................................................181 A. The Chain Broadcasting Rules: Context, Substance, and Rationale.........................................................182 1. The Structure of the Broadcasting Industry .....................182 2. The Chain Broadcasting Rules.........................................183 3. The Economic Theory Underlying the Chain Broadcasting Rules ..........................................................185 B. The Basic Economics of Vertical Integration .......................... 187 1. The Chicago School’s Rejection of Per Se Illegality ...........................................................................187 2. The Post-Chicago School’s Rejection of Per Se Legality .......................................................................202 C. Applying the Basic Economic Framework to the Chain Broadcasting Rules .......................................................206 1. Concentration in the Market for Television Networks ..........................................................................206 2. Concentration and Barriers to Entry in the Market for Home Delivery of Television Programming....................................................................212 3. Potential Efficiency Justifications....................................213 D. The Future of the Chain Broadcasting Rules........................... 217 II. The 1992 Cable Act and the Dynamic Inefficiency of Compelled Access ...........................................................................219 A. Description of the Cable Industry and the Regulatory Restrictions on Vertical Integration......................220 1. The Structure of the Cable Industry.................................220 2. Provisions of the 1992 Cable Act Affecting Vertical Integration ..........................................................221 3. The Economic Theory Underlying the Restrictions on Vertical Integration Contained in the 1992 Cable Act .....................................223 B. Structural Market Conditions ..................................................226 1. Concentration in the Market for MVPDs.........................226 172 Vertical Integration and Media Regulation in the New Economy 2. Concentration and Barriers to Entry into the Market for Television Networks ......................................230 3. Potential Efficiency Justifications for Vertical Integration in the Cable Industry........................232 4. The Special Problem of Rate Regulation.........................237 5. Empirical Evidence on Vertical Integration in the Cable Industry ............................................................238 C. The Problematic Nature of Compelled Access ........................243 1. The Relationship Between Compelled Access and Leveraging and Foreclosure Theory ..............................................................................244 2. The Administrability of Compelled Access.....................244 3. Compelled Access and Dynamic Efficiency....................246 D. The Future of the Vertical Integration Provisions of the 1992 Cable Act...............................................................247 III. Open Access to Cable Modem Systems and the New Economy Theories of Technological Change..................................248 A. The Cable Modem Industry and the Open Access Debate......................................................................................250 1. The Structure of the Cable Modem Industry....................250 2. Regulatory Consideration of Open Access ......................251 3. The Economic Theory Underlying the Open Access Debate..................................................................252 B. Structural Market Conditions ..................................................253 1. Concentration in the Market for Broadband Transport ..........................................................................253 2. Concentration and Barriers to Entry into the Market for ISPs ................................................................259 3. Potential Efficiencies from Combining Cable Modem and ISP Services .................................................260 4. Post-Chicago Models of Open Access.............................265 5. The Empirical Evidence on Open Access........................267 C. The Problematic Nature of Compelled Access as a Remedy.....................................................................................268 D. The New Economy Arguments: The Effect of Standardization on Innovation.................................................269 1. The Tradeoff