Open Doors?

What's Wrong With Deregulation?

Yet despite the example of the trucking industry, in some cases, deregulation does not benefit entrepreneurs. At times, the government pays lip service to deregulation while favoring older, more entrenched companies. Deborah Avant, an associate professor of political science at George Washington University in Washington, DC, notes that while the Pentagon has said it's deregulating the military contracting industry, it continues to offer contracts--without taking a large number of bids--to the same large companies that have traditionally dominated the defense industry.

In other cases, deregulation without enforcement of the statutes kept on the books, or overly rapid deregulation, can wind up actually fostering consolidation and putting power in the hands of the old monopolists. "You can't have wholesale deregulation without keeping some of the necessary rules in place," says Harrett. In the radio industry, for example, relaxation of federal rules on the number of stations one company can own, combined with lax enforcement of still-existing regulations designed to guarantee competition in each radio market, has allowed the conglomerate Clear Channel to dominate the airwaves in many markets. As a result, Clear Channel has pushed many small stations out of business.

"You can't deregulate so quickly; you have to make sure big companies don't backslide into monopolistic behavior. Deregulation should ensure the marketplace works, not that the marketplace gets trampled."

Similarly, says Chris Edwards, fiscal policy director at the Cato Institute, a Washington, DC, think tank, the incomplete and rapid deregulation of California's energy industry in the late 1990s did not create a level playing field between older and newer companies. Older firms consolidated power and used their knowledge of the market to manipulate energy prices upward.

Perhaps the worst situation has been in the telecommunications industry, which was supposed to be deregulated by the Telecommunications Act of 1996. Though deregulation led to the founding of a few smaller phone and Internet companies since that act was passed seven years ago, the major local and long-distance companies have actually increased their share of the national and state markets. According to strategy and technology consulting firm Booz Allen Hamilton, based in McLean, Virginia, small, local phone companies earned nearly $15 billion in revenue last year. By comparison, the larger phone companies--the so-called "Baby Bells" that are descendents of the old AT&T national monopoly--earned nearly $120 billion.

Telecom deregulation failed for several reasons. "The deregulation happened so thoroughly and quickly that it wiped out the kinds of regulations we needed to keep--regulations that would prevent Baby Bells from using the advantages they enjoyed to keep their monopoly power," says William Schuck, a former Ohio state legislator and now executive director of Competition Ohio, a nonprofit group in Columbus that's focused on telecommunications choice.

For example, Schuck says, though the Baby Bells were required by the 1996 act to allow smaller companies to use their telephone lines and exchanges, the Bells allegedly have provided worse lines and exchanges to those smaller companies, preventing them from winning customers. "You can't deregulate so quickly; you have to make sure big companies don't backslide into monopolistic behavior," Schuck says. "Deregulation should ensure the marketplace works, not that the marketplace gets trampled."

Even when deregulation succeeds, it can have unexpected side effects for entrepreneurs. In the trucking industry, after the initial round of deregulation in the early 1980s, thousands of new, small logistics companies entered the field. With so many new firms, prices for trucking fell precipitously, wages dropped, companies had trouble retaining drivers (since few of the best truckers were willing to work for lower wages), and thousands of companies went out of business in the mid-1980s. Even today, Hanke says, "margins in the trucking business are only 2 or 3 percent; they're below what they should be."

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This article was originally published in the September 2003 print edition of Entrepreneur with the headline: Open Doors?.

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