Vertical Integration and media regulation in the ew Economy Christopher s. Yo Recent mergers and academic commentary have placed renewed focus on what has long been one of the central issues in media policy whether media conglomerates can use vertical integration to harm competition. This Article seeks to move past previous studies, which have explored limited aspects of this issue, and apply the full sweep of modern economic theory to evaluate the regulation of vertical integration in ledia-related industries. It does so initially by applying the basic stai efficiency analyses of vertical integration developed under the Chicago and post-Chicago Schools of antitrust law and economics to three industries: broadcasting, cable television, and cable modem systems. An empirical analysis reveals that the structural preconditions recognized by both Schools as necessary for vertical integration to harm competition do not exist in any of these industries. In addition, the cost structure of these industries suggests that vertical integration may well lead to efficiencies sufficient to justify allowing such integration to occur. a dynamic efficiency analysis provides additional reasons for believing that attempts to regulate vertical integration in these industries are misguided. Growing reliance on compelled access to redress the problems purportedly caused by vertical integration threatens to dampen investment incentives in technologically dynamic industries in which such incentives are particularly important. Not only does forcing a monopolist to share an input deviate from the system of well-defined property rights needed to promote efficient levels of investment, it also deprives nen entrants seeking to compete directly with the supposed monopoly bottleneck of their natural strategic partners. The Article also engages a complex web of arguments involving the extent to which technological innovation is affected by market concentration, standardization, and network externalities. A close review of the economic literature reveals f Assistant Professor of Law, Vanderbilt University Law School. This Article benefited nmensely from a workshop conducted while I was serving as a Fellow for the Center for would also like to thank Ash Bhagwat, Tim Brennan, Andy Daughety, Paul Edelman, Luke Froeb, John Goldberg, Ron Krotoszynski, Mark Lemley, Ed McCaffrey, Bob Rasmussen, Jennifer Reinganum, Jim Speta, Matt Spitzer, Eric Talley, Randall Thomas, Bob Thompson, Mark Weinstein, and Phil Weiser for their helpful comments on earlier drafts of this Article, as well as Rob Mahini, Rob Schmoll, and Paul Werner for their expert research assistance. I should also disclose that I served as a law clerk for the courts that decided State Oil Co. v. Khan, 522 U.S3(1997), and Time Warne Entertainment Co v. FCC, 93 F3d 957(D.C. Cir. 1996). The views contained in this Article are my Copyright 0 2002 Yale Journal on RegulationCopyright © 2002 Yale Journal on Regulation Vertical Integration and Media Regulation in the New Economy Christopher S. Yoo† Recent mergers and academic commentary have placed renewed focus on what has long been one of the central issues in media policy: whether media conglomerates can use vertical integration to harm competition. This Article seeks to move past previous studies, which have explored limited aspects of this issue, and apply the full sweep of modern economic theory to evaluate the regulation of vertical integration in media-related industries. It does so initially by applying the basic static efficiency analyses of vertical integration developed under the Chicago and post-Chicago Schools of antitrust law and economics to three industries: broadcasting, cable television, and cable modem systems. An empirical analysis reveals that the structural preconditions recognized by both Schools as necessary for vertical integration to harm competition do not exist in any of these industries. In addition, the cost structure of these industries suggests that vertical integration may well lead to efficiencies sufficient to justify allowing such integration to occur. A dynamic efficiency analysis provides additional reasons for believing that attempts to regulate vertical integration in these industries are misguided. Growing reliance on compelled access to redress the problems purportedly caused by vertical integration threatens to dampen investment incentives in technologically dynamic industries in which such incentives are particularly important. Not only does forcing a monopolist to share an input deviate from the system of well-defined property rights needed to promote efficient levels of investment, it also deprives new entrants seeking to compete directly with the supposed monopoly bottleneck of their natural strategic partners. The Article also engages a complex web of arguments involving the extent to which technological innovation is affected by market concentration, standardization, and network externalities. A close review of the economic literature reveals † Assistant Professor of Law, Vanderbilt University Law School. This Article benefited immensely from a workshop conducted while I was serving as a Fellow for the Center for Communications Law and Policy at the University of Southern California Law School, as well as a workshop at the 2000 Annual Meeting of the Southeastern Association of American Law Schools. I would also like to thank Ash Bhagwat, Tim Brennan, Andy Daughety, Paul Edelman, Luke Froeb, John Goldberg, Ron Krotoszynski, Mark Lemley, Ed McCaffrey, Bob Rasmussen, Jennifer Reinganum, Jim Speta, Matt Spitzer, Eric Talley, Randall Thomas, Bob Thompson, Mark Weinstein, and Phil Weiser for their helpful comments on earlier drafts of this Article, as well as Rob Mahini, Rob Schmoll, and Paul Werner for their expert research assistance. I should also disclose that I served as a law clerk for the courts that decided State Oil Co. v. Khan, 522 U.S. 3 (1997), and Time Warner Entertainment Co. v. FCC, 93 F.3d 957 (D.C. Cir. 1996). The views contained in this Article are my own, as are any errors