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FTC Proposes Rule of Thumb for Regulating Disruptive Competition

· March 12, 2013

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A consistent theme here at DisCo is government getting in the way of new business models or disruptive market entrants.  Because disruptive competitors do things differently — and usually more efficiently — than incumbents, government regulators often have a difficult time understanding how new types of businesses fit in old silos of regulation.  Even worse, the old entrenched businesses frequently lean on their political connections and get the government to come up with some justification for shutting down the new competitors or, at the very least, harming their competitive advantages.  Whether it is local governments passing ordinances designed to undercut the business model of food trucks at the behest of local restaurant associations, state governments saddling Internet startups with huge licensing fees just for facilitating transactions, or the FDA taking 8 months to approve a toothbrush that plays music, the story is the same across all levels of government.

Uber — the dynamic startup that has used a mobile application to revolutionize local transportation service — has become a poster child of an innovative company being targeted by anti-disruption incumbent lobbying.  Local taxi associations have filed ridiculous lawsuits and ginned up local officials to hit the company with regulatory actions harming its ability to do business in well over a dozen municipalities.  Not surprisingly, the Colorado Public Utilities Commission (CPUC) recently followed suit and proposed a series of regulations designed to prevent Uber from being an effective competitor.  Furthermore, like actions in other cities, these regulations were offered under the guise of protecting consumers (because saying you are protecting powerful political interests at the expense of the public is politically unattractive).  These proposed “consumer protection” regulations included mandating that limousines offer only a specific up-front fixed price (making Uber’s variable demand-based pricing illegal), requiring all services that advertise or offer transportation service to be regulated as an actual transportation company (Uber has no cars, it simply connects limo/taxi drivers with customers via a mobile app), and preventing limousines and non-cab car services from stationing within 200 feet of a hotel, motel, restaurant, bar, taxi stand or airport passenger pickup location.  Things did not look good for the company in Colorado.

However, in a little-reported action last Thursday, another government agency stepped in — on behalf of the disruptive entrant (and, more importantly, consumers).  The U.S. Federal Trade Commission (FTC), which wears a dual hat as both a competition regulator and a consumer protection agency, filed a great comment in support of Uber.  Not only was the brief targeted at the proposed Colorado regulations, but it offered a universal maxim that all regulators seeking to impose restrictions on a new company or business model should take to heart:

In evaluating claims that the practices to be prohibited impose a genuine threat to consumer welfare, we recommend that the CPUC be guided by the principle that any restriction to competition designed to address such potential harm should be narrowly crafted to minimize its anticompetitive impact.

The FTC further articulated the principle later in the letter:

In general competition should only be restricted when necessary to achieve some countervailing procompetitive virtue or other public benefit such as protecting the public from significant harm.

Amen.

The FTC’s proposed principle has an intellectual history and provenance, and a near-identical principle is used in international trade agreements to make sure that exceptions to free trade commitments for “social stability” or “national defense” don’t eat the actual commitments themselves.  One example from the WTO’s Technical Barriers to Trade Treaty reads:

Members shall ensure that technical regulations are not prepared, adopted or applied with a view to or with the effect of creating unnecessary obstacles to international trade.  For this purpose, technical regulations shall not be more trade-restrictive than necessary to fulfil a legitimate objective, taking account of the risks non-fulfilment would create.

In applying the “least restrictive means of protecting against a legitimate harm” principle to the CPUC’s specific proposals, the FTC argued that changing the definition of motor carriers would create “an unwarranted barrier to entry… and may inhibit, impair, or preclude new and innovative ways in which independent applications can affiliate with transportation service providers.”

Addressing the CPUC’s “fixed price” requirement, the FTC stated that such a requirement would ban “new types of application-based demand pricing, which might potentially benefit consumers and competition” as demand pricing is an “efficient way to allocate resources (e.g. vehicles and drivers) to consumers.”  Furthermore, the FTC contended that there does not appear to be evidence that “pricing models other than a ‘specific fixed price’ will harm consumers,” and if evidence did arise indicating consumer harm, “any restriction designed to address that harm should be narrowly crafted to minimize the anticompetitive impact.”

Lastly, the FTC addressed the most egregious of the proposed CPUC regulations, the requirement that non-taxi car services could not station within 200 feet of just about any commercial establishment or taxi stand, by stating that “absent some specific compelling evidence that the presence of luxury limousine vehicles in the proximity to typical passenger pick-up areas will harm consumers, this change should not be adopted.”  Furthermore, the FTC stated that problems of congestion and queueing “do not support this broad proposed restriction” and noted the relatively obvious point that the presence of a high number of transportation vehicles usually only occurs “if there is demand for such vehicles in the area.”

Often times where you stand depends on where you sit.  Given that the FTC is charged with preserving competition — and is stocked with a number of highly qualified lawyers and economists who have dedicated their lives to this task — it makes sense that they came to the defense of Uber in this instance (that is not to say I am not pleasantly surprised that they chose to pick this fight).

In fact, as Marvin Ammori points out, the FTC has taken action against anticompetitive taxi regulations going as far as filing antitrust lawsuits against the cities of Minneapolis and New Orleans in the mid-1980s for colluding with private taxi companies to keep out competition.  (The FTC also produced a 176-page study on the uncompetitive taxicab market in 1984).

While an extensive federal government litigation campaign against cities might not be feasible, a couple of well-chosen lawsuits would go a long way towards sending a message that anticompetitive collusion between regulators and taxicab companies is verboten.  However, as Ammori also points out, while federal regulators have authority over city ordinances, states are largely exempt from federal antitrust law.  As a result, it is unlikely that the FTC could bring an enforcement action against the Colorado PUC.

With this in mind, perhaps the biggest service the FTC could provide would be to use its economic and legal expertise to espouse the principle it highlighted in its comments to the CPUC.  At the very least, the FTC can use its position of authority to poke holes in the flimsy arguments made to foist anticompetitive regulations on innovators in the name of consumer protection.  After all, the agency is also our nation’s top consumer protection body, so who is a better judge of the veracity of consumer protection claims?  

Competition

Some, if not all of society’s most useful innovations are the byproduct of competition. In fact, although it may sound counterintuitive, innovation often flourishes when an incumbent is threatened by a new entrant because the threat of losing users to the competition drives product improvement. The Internet and the products and companies it has enabled are no exception; companies need to constantly stay on their toes, as the next startup is ready to knock them down with a better product.