Regulation and Rents

Here’s James Bessen writing in the Harvard Business Review:

…in 1992 Congress passed the Cable Television Consumer Protection and Competition Act in response to high cable TV rates. Regulators expected cable prices to fall by 10%. Instead, however, cable companies changed their programming bundles, prices did not fall, and corporate valuations increased. The chart below shows that the aggregate market value of cable companies relative to assets (Tobin’s Q) rose following the Act, compared to valuations of other firms.


Regulation doesn’t seem to have reduced profits in the cable industry and may have increased profits. Is there a general lesson here? In a new paper, Bessen finds that the answer is yes:

The pattern around the 1992 Cable Act is representative: I find that firms experiencing major regulatory change see their valuations rise 12% compared to closely matched control groups. Smaller regulatory changes are also associated with a subsequent rise in firm market values and profits.

This research supports the view that political rent seeking is responsible for a significant portion of the rise in profits. Firms influence the legislative and regulatory process and they engage in a wide range of activity to profit from regulatory changes, with significant success. Without further research, we cannot say for sure whether this activity is making the economy less dynamic and more unequal, but the magnitude of this effect certainly heightens those concerns.

Addendum: Reed Hundt, chairman of the FCC from 1993 to 1997, discusses cable TV regulation during this period in the comments.


Consolidation in the industry reduced competition, allowing cable companies to increase rates almost at will. One might argue that regulation "caused" the consolidation, but to be consistent wouldn't "regulation" have prevented the consolidation?

Cable had (and still does) a natural monopoly with the service dependent on having wires strung throughout the service area. Weren't there regulations preventing the other natural monopoly to offer cable television services, as well as the cable companies prevented from offering telephone services? Aren't the airwaves for wireless transmission of television strictly regulated where cable tv offerings are not available except through cable?

This is one source of the Great Stagnation. It is far cheaper and less risky to buy yourselves a few politicians than to innovate in the face of competition. such thing as a "natural monopoly", there are always competitive alternatives in a market-- absent government intervention. Original cable TV monopolies were created/enforced by state/local politicians ....and those corporations still retain legacy monopoly power despite some easing of monopoly regulations over the years.

The dominant saltwater economists just can't fathom rent-seeking, regulatory capture, nor public choice theory... just a few tweaks to the awesome regulatory system and all will be well.

Meant to say "so natural and 'natural'"

It is true that cable is not a natural monopoly, but something created by the government.

In Chile, since the late 1980s, there have always been several cable and telephone providers competing with each other. There are fewer providers that at a high point during the nineties, but you can generally pick among three or four providers (at least in the major cities). Interestingly, one of the most recent providers in Santiago is the electric utility (which is a private company).

How has competition between Verizon and Comcast gone in the roughly dozen markets where Verizon rolled out Fios?

Has it been such a success that Verizon will replace all copper with Fios?

If not, why?

What does "natural" mean when applied to monopoly? There were monopolies--see Standard Oil and US steel 100 years ago--even without government intervention.

I suggest studying up on Cournot Equilibrium's which occur in the market when government isn't present.

Slight edit above: cournot isn't really relevant since it applies regardless of how the monopoly occurs. The larger point remains, if a large enough company becomes entrenched it can squash any competition, selling below cost, and maintain its stranglehold on a market.

A "natural monopoly" is alleged to occur when specific production factors, such as relatively high fixed costs, causes long-run average total costs to decline as output expands. In such industries, the theory goes, a single producer will eventually be able to produce at a lower cost than any two other producers, thereby creating a "natural" monopoly-- one inherently caused by the special "nature" of that industry among most others.
Higher consumer prices will supposedly result if more than one producer supplies that special market; thus, government legal endorsement of a natural monopoly is thought to benefit consumers.

Government enforced monopolies were created decades before this theory was formalized by intervention-minded economists in the 1920's, who then used the new theory to justify government market intervention after-the-fact. When the first government franchise monopolies were being granted, most economists understood that large-scale, capital-intensive production did not lead to monopoly, but was a highly desirable aspect of the competitive process.

There is no historical evidence of the "natural-monopoly" scenario ever happening — of one producer achieving lower long-run average total costs than everyone else in the industry and thereby establishing a permanent "natural" monopoly. In many of the so-called public-utility industries of late 18th and early 19th century America, literally dozens of competitors operated -- totally unaware their existence was impossible under the economic theory of "natural monopoly".

Beyers, you clearly have edited history, or your study of history.

The evidence is very clear that monopolies in certain industries are natural because only one entity can own any property required to connect to all possible and willing customers.

Try to provide transport access to my driveway without violating the property rights of We the People, an entity that owns the road.

The cases of Standard Oil and US Steel are more complicated than that. In any case, market dominance isn't the same as a monopoly.

Are you arguing that there is no monopoly to the land you must travel to get home?

That if the roads in the US were privatized and the private owner charged a toll, you would have even theoretical alternatives?

Cable companies have franchises to use the public way, and they rent space on poles planted by power utilities with a franchise to use the public way. These franchises need to be monopolies pretty much by the laws of nature.

If more than one power utilities is allowed to compete, then that means ten must be allowed to independently plant poles and string wires. To argue that two can compete but not three, or three but not four, means government is picking winners and losers because of a natural monopoly.

And you can't use wireless to compete with cable without using the public way to do the back haul from all your cell towers. It is impossible to provide the needed data bandwidth wireless lyrics without probably 10 million cell sites minimum, probably more like a 100 million in the US alone. That means putting a cell site on a quarter to half the existing power poles, plus a lot more in buildings and on buildings.

And not even messengers carrying disk drives provide totally free competition because they must use the roads which are a monopoly with limited access.

And tunneling requires exclusive right of way if for no other reason than the surface land owner has a common law right to drill thousands of feet down anywhere.

Nature creates natural monopolies.

In my town we have one high speed provider, who delivers coax, and no optical. No natural and "natural."

I think data might be different than water and sewer. While competing water pipes would be madness, data "pipes" are smaller, easier to pile in a cable vault.

Overall I find it strange to blame "regulation" when "deregulation" was the great rent seeking gold rush. I don't have optical because "deregulation" set boundaries.

You want optical in a region where the company would lose money on it and you complain about their rent seeking?

I won't mention which town I live in, but the much poorer one a few streets over has optical, because they have a different monopoly provider.

I really don't know how you can claim that the monopoly decision to extract rents using coax is a market success.

Basically TMC, how did you find yourself on the side of crony capitalism, and a city council picking one vendor to extract monopoly rents on a population?

For the new paper the author measures changes in regulations using an index called Regdata, which measures regulatory change. OK. Then he limits it to such industries as petroleum, chemical industries, and a few more and correlates reg changes with profitability.


Take petroleum. Did anything happen during this period that affected profitability, like, maybe, OPEC. Or take new legislation regulating emissions--that requires regulations to implement the statute, and would show an increase in the Regdata index.

Sometimes having a computer and access to Compustat is not a good thing.


Sorry but the chart does not correspond to the words. Value to assets fo cable companies appears to be 1.9 before the act and 1.9 at the right edge of the chart. Value to assets of other firms appears to be 1.3, rising to 1.5. So how does that mean "The chart below shows that the aggregate market value of cable companies relative to assets (Tobin’s Q) rose following the Act, compared to valuations of other firms." Value to assets of cable companies was high and remains high, but did not increase as fast as other firms.

This is my concern too. The chart doesn't show what the authors propose. This must be another Alex post.

Yup, cool story bro

Tobin's Q is the stock market value relative to the book value. We would expect the value of the regulation to be incorporated into the stock market value before the regulation passed, especially if there wasn't much uncertainty, so it makes sense that the value rises somewhat before the Act actually passes.

I suspect even in cases where the firms fight a given set of regulations, they may well benefit from the effects over the long run. After all who is better placed to handle a confusing morass of vague regulations than a large entrenched firm.

The regulations may be restrictive, but they are far more of a hurdle to potential new comers. So the business moat grows larger.

Yep -- the regulated firms don't have to win everything they want initially. In fact, it's probably easier to succeed gradually as their lobbying efforts mature and make more and better connections and as everyone outside the industry stops paying much attention. Think of regulatory capture an process that bears fruit over time.

The Telecommunications Act of 1996 is missing in that beautiful and elegant graph. They started making more money because of that little thing called Internet.

"Within months of President Clinton's signature on the 1996 Act, it became clear that cable was in a position to be the first to bring broadband to the masses......While it is sometimes argued that the 1996 Act did little to anticipate either broadband or the Internet, this overlooks the powerful impact of the statute on cable's investment in broadband facilities. In 1996, virtually none of America's Internet users had high-speed broadband connections. "

So, from 1992 to 1996 the Cable Act worked. From 1996 and on it's a whole different story called cable Internet. The expectations of the 1996 Act were enough to drive the valuation up of cable companies.

Good catch.

It seems the author is missing the main issue of government regulation is that markets change over long term time periods. It looked it 'worked' until 1996 when market changes with the coming Internet boom. (And why did the author stop at 1997? Isn't there data in 1998 - 2006ish?)

Also, didn't the act promote the satellite providers like Dish Network as well?

Beat me to it - just envision another dotted vertical line at Jan. 1996...

“What difference, at this point, does it make?”

I believe England has a weird setup where there is one cable, but you can buy a different "provider" for it.

Weird but better than the pure monopoly in my city.

We use that setup for gas, electricity and telecom services. The service provision is separate from the cable or pipeline operation. The cable/pipe operation is a regulated monopoly while the supply is a competitive marketplace. The suppliers don't hesitate to complain to the regulator if they believe that the cable/pipe operator is favouring the supply arm of that company, or overcharging or in some other way abusing their position. And they have the resources to back up their complaint.

It's British Telecom (and Kingston Communications in Hull) that must allow other companies to use its cabling to provide internet service. Virgin Media, who own pretty much all the active cable franchises (covering about half the population, the cost of installing cable proved prohibitive), don't have to let anyone else use their cables. They don't have a monopoly as Sky TV provides satellite TV everywhere, most popular channels are free to air on digital TV and ADSL2+ and FTTC internet services are available from a wide range of ISPs in most of the country over BTs cables. This is easily fast enough for television services.

Is that really what we see from this data? It looks to me like the bill's passage is correlated with a quick drop in valuation, followed by a few years of stagnating to declining valuation, and then finally a pickup in 1997. Should we credit that pickup to this bill and not to anything else going on in that era related to the cable industry (the rise of the internet maybe?).

The rise of the internet, and the strangely unmentioned massive deregulation following the Telecommunications act of 1996.

Well, not strangely unmentioned... It didn't fit the desired narrative. I think that's the likely reason it isn't mentioned.

The relative performance of the S&P index of broadcasters and cable TV rose form 10.16 in November, 1991 to a peak of 15.34 in November, 1993 before it fell back to 10.05 in December, 1996.

Not surprising since the big firms write 99% of the regulations anyways. You think these nepotists with MPA degrees and no real-world experience could write meaningful regulations? It's the firms themselves, creating their own moats.

As the FCC chairman from 1993 to 1997 I can offer my experience, which of course the economists can weigh as they wish. The 1992 Cable Act implementation depended on the FCC. In 1993, before I was confirmed, the Commission implemented the Act intentionally or not so as to raise rates for the same packages. Congress became understandably upset so when I was confirmed in November 1993 we immediately did the regulations over and then lowered prices for the same package on average nationwide about 5-10% but we specifically created a framework whereby any cable provider could charge more if it provided more content. In other words, our rule was "less for the same, but more for more." Our goal was to create incentives for adding capacity. In the barely visible future, this extra capacity was turned into the "pipe" for high speed broadband, which is probably the primary reason that cable and not the telephone companies are the major ISPs in the United States (not true in other countries, where the reverse is the case).
No, our agency was not captured. Indeed, the industry vilified me. But what is true is that after Congress changed hands in 1994, the new Republican leadership negotiated in the 1996 Cable Act for an end to cable rate regulation and in order to obtain a bipartisan bill the White House agreed. Yes, Congress was "captured," or you could say that Congress changed its mind and came to believe that regulating the price of content is too difficult, given that the actual events and shows within any channel can be moved to some other channel, and so it is difficult or perhaps impossible to determine what exactly should be price-regulated. Should it be the event (a football game) or the channel (ESPN)? If it is the channel then the owner of the game can move the game to some non regulated channel. Complexity ensues.
In any case, in my view the Commission from 1994 to 1996 in fact did lower rates for the same packages, and did create useful incentives for expanded packages. I note from what I've read in comments and in the report of the study no awareness of the key dates in this story and I know no one called me. But maybe I'm not being fair to the commenters or the study. Reed Hundt

Mr. Hundt's post reveals the actual (not ideological) problem with "regulation", a problem covered in many scholarly articles by Francis Fukuyama (e.g., "The Decay of American Political Institutions", The American Interest (December 8, 2013). Our political institutions are broken for the same reason one of the major political parties is broken. As Mr. Hundt states, it's Congress that has been "captured", not the bureaucracy.

I doubt it rayward. Congress delegates to agencies which then get captured. Agencies make up stuff as they go along, aka regulatory law that is not easy to fight in court. And what does Fukuyama know? End of history was a howler.

As for cable and internet, Hundt makes a good point (his example that the US is alone in the world is very telling). My family members in DC get internet via cable. But nobody watches cable TV channels, and 'basic cable' has been going up in price the last few decades more than inflation.

500 channels on cable and not a single one is a chess channel, or a Greek channel (or Philippine channel with the popular ladyboy Vice Ganda, though I did see a Spanish channel a while ago). I guess they can't afford the fees for the latter ethnic channels, except for the large Spanish market, but surely there must be some joker who can lecture on chess for peanuts on the former? Is content that expensive? I think eventually some illegal streaming of content via fibre optic will be the wave of the future, but for now cable is 'ok', barely.

Both the study and Mr. Hundt's recollections are likely true. Cable (specialized broadband) was and is based upon technologies subject to moore's law. As a result, the cost of delivering a unit of content was falling steadily and rapidly through this period - at the end consumers were paying the same or somewhat more but were getting far more value. It was not a zero sum game. The way to interpret the chart is that during a period of rapid technological advance companies with monopolistic or oligopolistic market positions are going to capture a greater share of the benefits, reducing the GAIN in consumer surplus. Congress, looking at the situation, judged that the gains from letting everyone compete any way they wanted were superior to the gains of regulation minus the losses of rent seeking behavior. Judged by the speed and access to broadband today (which IMHO notwithstanding the wailing and gnashing of teeth is very good when compared apples to apples with the rest of the world) it wasn't a bad call.

Maybe I am too casual an observer, but I thought deregulation said you could have 1 cable TV, 1 telephone company, and 1 satellite company, in any combination. That was intended to provide sufficient competition.

But the fact that 2 cable companies tended not to come head to head created a rent.

AT&T as the second allowed land line competitor had the luxury of entering late, and having a high cost structure in place. Divide the spoils.

(Up until a few months ago AT&T had not rolled higher than 768k to my street. One page now says multiple Mbit. I'll have to see if that is correct. If I finally have two choices, I will indeed have competition!)

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