Consumer “Protection”

After seventeen months of deliberation, investigation, and debate, it appears that the federal government will finally allow satellite radio providers XM and Sirius to merge. The regulatory hurdles the companies had to overcome were ostensibly in place to protect consumers, but the effect of the regulations were to waste resources and delay a merger that will benefit consumers. Regulatory barriers are an impediment to growth in poor countries. They are also an impediment to growth in the United States.

According to economic theory, monopolies are bad for consumers because they produce too little and charge too much. These regulations are supposed to preserve competition and protect consumers. Regulations passed by the Federal Trade Commission, the Federal Communications Commission, and other agencies are allegedly “pro-consumer,” but as George Mason University economist Bryan Caplan suggests, the XM-Sirius merger debate is “a classic case of Orwellian ‘pro-consumer [regulations] that discourage innovation and equate ‘the public interest’ with ‘that which does not interest the public.’”

There are unintended, negative consequences of government regulation, and they are evident in the XM-Sirius case. Government regulation encourages rent-seeking. XM and Sirius want to merge because they think the combined company will be more profitable than the companies would be operating separately. This creates an opportunity for people to enrich themselves through the political process.

Regulators and other interested parties will have an incentive to try to capture that increment to profit. In this case, the FCC was able to shake down the companies for special favors like special preferences for “noncommercial” broadcasting as well as a three-year price control.

The entertainment market is already extremely competitive. Satellite radio competes with numerous other media. It is a clear case in which the two firms will be able to combine their programming. Perhaps they will eliminate the least-popular programming; some, who really enjoy the most marginal of XM and Sirius programming will not like this. However, there will be an increase in consumer welfare as satellite radio subscribers can enjoy the best of both. The companies want to merge because they are competing with internet radio, MP3 players, and land-based radio. The Justice Department approved the merger in March because consumers have numerous alternatives to satellite radio. In other words, a “monopoly” satellite radio provider wouldn’t harm consumers because it is not a monopoly.

The coalition that opposed the mergers was a classic case of the “Baptists and bootleggers” phenomenon. Supposed “public interest groups” who thought the merger would be bad for competition were against it; so too were members of the National Association of Broadcasters—land-based traditional radio stations—who would have been threatened by the cost savings Sirius and XM could have enjoyed.
The debate raises a fundamental philosophical issue about the nature of government and property. The companies and their capital are private property. The essence of freedom is that they should be able to merge without being answerable to anyone other than their stockholders and their customers. In this case, the purported guardians of consumer welfare are in fact working to the detriment of consumers by slowing down the market process and by diverting resources away from productive and toward unproductive activities. There is a theoretically plausible case for government regulation, but the practical consequences are counterproductive and wasteful. It took the government seventeen months to reach a decision, and we are all poorer as a result.

In early 2007, the companies endured the longest delay between merger application and the FCC’s 180-day review in FCC history. The Justice Department approved the merger in March, and by the end of July the issue had not yet been resolved. Regulatory barriers are among the reasons why so many poor countries remain poor; unfortunately, the saga of the XM-Sirius merger suggests that the United States is headed in the same direction.

Art Carden is a Research Fellow at the Independent Institute and Associate Professor of Economics at Samford University.
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