Is There a Need for Economic Regulation of the Internet

Two necessary preconditions must be satisfied to justify market intervention in the form of economic regulation on the part of the government, says Dennis Weisman, Professor of Economics at Kansas State University and an editor of the Review of Network Economics and a member of the Free State Foundation's Board of Academic Advisors.

The first one inquires as to whether there is a problem and the second one inquires as to whether there is a solution? Only if both questions can be answered in the affirmative can such intervention be justified.

He says the case for economic regulation of broadband markets is weak at best. The Federal Communications Commission can point to, at most, two cases where things went awry — Madison River and Comcast.

Madison River was resolved with dispatch; and in the case of Comcast, the supposed cover-up was arguably worse than the alleged crime, Weisman says. "There is no offense in reasonable network management practices designed to prevent congestion and maintain service quality," he adds.

Nor is there evidence that the major incumbent telecommunications carriers or the cable companies were earning supra-normal returns that might be suggestive of market power," which might imply there is a problem waiting to be solved. http://ssrn.com/abstract_id=1525568

The structure of broadband prices is a problem in the economics of two-sided markets, though. The issue is that it is difficult to determine how the price structure should be changed to enhance economic welfare. "In other words, there can be no reasonable assurance that regulatory intervention to alter the price structure would not do more harm than good," says Weisman.