Singer and Crandall Release Study on Price Squeezes and the Internet

April 26, 2005

On April 26, 2005, Dr. Robert W. Crandall of the Brookings Institution and Dr. Hal J. Singer of Criterion Economics released a paper that examines the role of unaffiliated Internet service providers (ISPs) in the broadband era, and the appropriate response for regulators given the emerging industry dynamic. In this paper, Drs. Crandall and Singer assess the merits of a generic price squeeze allegation made against a vertically integrated telecommunications company—namely, a DSL provider. They review the role of regulation in promoting competition by facilitating entry into broadband services by unintegrated ISPs. Next, they discuss the earlier generation of ISPs’ contribution to consumer value, and ask whether they can continue to do so in a broadband world. The authors conclude that the social cost associated with the elimination of ISPs (and the incremental competition they inject at the retail level of broadband service) is negligible. Finally, they review the price squeeze allegations. Using a traditional antitrust paradigm, they identify the conditions under which such a price squeeze would harm consumer welfare. Drs. Crandall and Singer conclude that while the price squeeze test yields information about the welfare of an equally efficient retailer, it yields little information about consumer welfare. They end by discussing the relationship between price squeeze and cross-subsidies.

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