The Peltzman model: a way to understand the kind of regulation Facebook might face from Congress

Sam Peltzman proposed a model of regulation where the profitability of firms is in tension with their customers' desire for low prices and politicians' desire to get votes.

In Peltzman's model, companies can get politicians off their backs — or get them to institute anti-competitive policies that benefit them — by bribing them with campaign contributions, but the limit on this is that voters will eventually publish politicians for letting companies rip them off.

Politicians look for ways to regulate monopolies that diverts some of their profits to key constituents, keeping the threshold of profit-diversion to a point where the monopolist can still bank large profits.

In the case of Facebook, voters are worried about the costs in privacy, not cash, and the model predicts that Facebook will amp up its Congressional campaign funding and also to create programs that enrich key constituents in key electors' constituencies.

Who will be subsidized? Be sure to watch the key players as there is plenty to go around and the money has only begun to flow but aside from campaign funds look for rules, especially in the political sphere, that will raise the costs of advertising to challengers relative to incumbents. Incumbents love incumbency advantage. Also watch out for a deal where the government limits profit regulation in return for greater government access to Facebook data including by the NSA, ICE, local and even foreign police. Keep in mind that politicians don't really want privacy–remember that in 2016 Congress also held hearings on privacy and technology. Only those hearings were about how technology companies kept their user data too private.

The Peltzman Model of Regulation and the Facebook Hearings [Alex Tabarrok/Marginal Revolution]