CTIA Questions FCC’s Use of HHI in Competition Report
The FCC’s wireless competition report cites a Herfindahl-Hirschman Index (HHI) increase as a clear warning sign that the industry has grown less competitive. But the CTIA questions the commission’s reliance on the index as one of the key measures in the report, the first in years that didn’t find the industry competitive (CD May 21 p1). CTIA also questioned how the measure was calculated for the report.
Sign up for a free preview to unlock the rest of this article
Timely, relevant coverage of court proceedings and agency rulings involving tariffs, classification, valuation, origin and antidumping and countervailing duties. Each day, Trade Law Daily subscribers receive a daily headline email, in-depth PDF edition and access to all relevant documents via our trade law source document library and website.
The U.S. industry’s weighted average index was 2848 in 2008, up from 2674 the previous year and an increase of almost 700 points since 2003, the FCC said. “The DOJ antitrust guidelines consider a market to be ‘highly concentrated’ if the post-merger HHI exceeds 1800,” the report notes. Commissioner Michael Copps said the increase “sticks out like a sore thumb."
But CTIA General Counsel Mike Altschul, a former Justice Department official, said in an interview that the index measures concentration, not competition. The measure has “been in use for 30 years now in market analysis for merger reviews by the expert agencies as a screen,” he said. “It doesn’t tell anybody anything about how competitively a market is performing. It’s just used as a screen as to whether the agencies are going to take a closer look, no look, or an extremely close look at a merger."
The wireless industry is by nature concentrated because the costs of entry are high and spectrum is scarce, Altschul said. “You tend to see more concentration, which means higher Herfindahls. That doesn’t mean you don’t see competition.” Competition and market concentration are different, he said. “There are incredibly concentrated industries like commercial airplane manufacturers where you just have Airbus and Boeing, which are very, very competitive,” Altschul said. “If I'm an airline, I get really good choices of prices and features from that kind of two-firm structure. On the other hand, there are markets with a lot of providers who sell undifferentiated goods who don’t really compete very much at all. All this is a screen, and it’s a one-size-fits-all screen across all kinds of different industries or markets."
Chris Guttman-McCabe, CTIA vice president for regulation, said the U.S. industry’s index is lower than those in other countries. “It’s something that we wish if they were going to highlight it, they would also at the same time highlight that it’s still the lowest on the planet,” he said. Guttman-McCabe noted that the way the FCC calculated the index tended to drive the numbers up. For example, he said, since the report is based on 2008 it doesn’t take into account the recent growth of MetroPCS, Leap and Clearwire, offering customers alternatives.
Analyst Anna-Maria Kovacs also questioned how the index was calculated. “It is worth noting that the HHI calculation does not include MVNOs, just facilities-based providers,” she wrote in a research note. “The report also notes in footnote 981 that the HHI calculation treats all carriers below the top four as a single operator, thus raising the HHI result considerably over what it would be if each provider were counted separately.” An industry source said that this assumption probably increased the index 200 points.
"A number of considerations were included in the report’s analysis of competition in the wireless industry today,” said an FCC spokesman, in response to the CTIA comments. “In this report, we've noted the fact that the HHI has increased, but it was one of many metrics discussed in the competition report. The FCC routinely uses HHI in contexts other than competition reports. For example, when we review wireless transactions, HHI is used as a screen for identifying circumstances in which further analysis is required and other factors are considered, rather than leading us to a conclusion based on this metric alone.”
"When Michael Powell took over, and national HHI scores were lower, the industry loved HHIs,” said Public Knowledge Legal Director Harold Feld. “They argued for abolition of spectrum caps based on low HHIs. But now, when HHIs show a concentrated market getting more concentrated, suddenly HHIs don’t reflect the ‘real’ competitive nature of the market.” Feld said the index should be just one of the FCC’s considerations in viewing the market. “But other factors -- including those raised by CTIA -- support the need for more aggressive polices to promote competition and protect consumers,” he said. “For example, the fact that spectrum is scarce and build out expensive creates a much less contestable market than a typical market for things like groceries, lessening the impact of competitive pressures even further since an existing provider does not need to worry about some new provider coming in unexpectedly to steal customers."
"Apart from any questions concerning whether the HHI is calculated correctly, or whether the report gives it undue emphasis in a technologically dynamic marketplace, for now there are enough other indications of the competitiveness of the market that I don’t think we should be overly worried about concentration,” said Randolph May, the Free State Foundation’s president. “I like the Sunday newspaper ad indicator. Have you bought a Sunday paper recently when there hasn’t been full or half page ads by the four nationwide providers, not to mention all the ads by the smaller carriers?”