Regulatory Whack-a-Mole

by on November 11, 2009 · 0 comments

If you have any credit cards, you’ve probably received notices recently that your credit card company is going to do you some wonderful favors, like apply payments to the balances carrying the highest interest rate first. These same notices also contain changes in other contract terms that might make you worse off. One of mine, for example, tells me that henceforth my annual percentage rate on purchases will be the prime rate plue 11.99 percent, with a minimum of 17.99 percent. The company tells me this is higher than my old fixed rate. (I don’t know what it was, since I never use credit cards to borrow.)

These changes are the result of new federal regulations that were supposed to make credit card companies give us a break on certain terms and conditions. But since all of the terms and conditions of the credit card contract are not comprehensively regulated, the companies can adjust other terms to make up for the money they lose as a result of the mandated regulatory changes. Some scholars call this “term substitution.”  I call it “regulatory whack-a-mole,” after that carnival game in which you whack a mole that pops up out of a hole only to have another mole pop up out of another hole.

What does this have to do with technology policy? Term substitution is a pervasive feature of reality whenever regulators regulate some, but not all, aspects of a transaction. Since technology markets are not comprehensively regulated like public utilities, we can expect to see term substitution all over the place in technology markets in response to regulatory mandates.

If you want to find term substitution in technology markets, think of transactions that are only partially regulated: 

  • If wireless companies couldn’t charge early termination fees, we’d pay more for phones.
  • The last time the federal government tried to regulate “basic” cable rates (for your local broadcast and public affairs channels), rates for “expanded basic” and premium channels went up. 
  • Casket sales have also experienced term substitution. Responding to low-priced Internet competition and federal regulations that allow consumers to BYOB (bring your own box), funeral directors simply reduce casket prices and increase the price they charge for their services.
  • Net neutrality regulation might have this kind of effect, if it prevents network operators from charging high-bandwidth users different prices from low-bandwidth users. Forcing them to charge everyone the same, unregulated price could mean the low-bandwidth users pay more than they otherwise would.

I’m curious to hear more actual examples from readers of term substitution in technology markets.  What’s the most interesting thing you’ve seen?

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