Stephen Breyer’s “Regulation and Its Reform” (1982) and Richard H.K. Vietor’s “Contrived Competition: Regulation and Deregulation in America” (1994) both address a central problem in American economic policy: when does government intervention improve market outcomes, and when does it create the very problems it seeks to solve?
Breyer, then a judge of the 1st U.S. Circuit Court of Appeals and a former special counsel to the Senate Judiciary Committee during the airline-deregulation hearings (and now, famously, a retired associate justice of the U.S. Supreme Court), constructed a taxonomy for diagnosing regulatory failure. Vietor, a Harvard Business School historian, documented how firms and markets adapted when decades-old regulatory structures collapsed.
More than three decades after their publication, these books provide both the analytical framework to identify regulatory dysfunction and the empirical record of what happens when reform transpires—together offering a durable guide for contemporary policy debates.
Breyer’s ‘Regulatory Mismatch’
Breyer organized his 1982 analysis around two taxonomies. The first categorized the traditional justifications for regulation: controlling natural-monopoly power, limiting economic rents, addressing externalities (costs imposed on third parties), correcting information asymmetries, and preventing “excessive competition.” The second taxonomy classified regulatory tools: cost-of-service ratemaking, historically based price controls, allocation under a “public interest” standard, technical standards setting, historically based allocation, and individualized screening.
The analytical power of the book emerged from Breyer’s concept of regulatory “mismatch.” A mismatch occurs when regulation seeks to correct a perceived market failure:
It should be painfully apparent that whatever problems one has with an unregulated status quo, the regulatory alternatives will also prove difficult.
A mismatch also occurs when a regulatory tool is fundamentally unsuited to the identified problem:
Our examination of market defects, classical modes of regulation, and alternative regimes suggest that regulatory failure sometimes means a failure to correctly match the tool to the problem at hand.
Breyer claimed that airline regulation was the “best-documented example” of mismatch. Prior to deregulation, the Civil Aeronautics Board (CAB) regulated airlines using cost-of-service ratemaking and strict entry controls—tools designed for natural monopolies where economies of scale make competition wasteful.
Yet the airline industry faced no such structural constraints. Entry barriers were low, and no significant economies of scale prevented multiple carriers from serving routes profitably. In these industries, the concern was “too much” competition, rather than too little. For example, Vietor opens a chapter of his book with a 1947 quote from the chair of American Airlines:
There is need for reasonable competition, but there is a limit to reasonable competition and there is such a thing as wasteful competition.
Breyer characterized the “excessive competition” rationale for airline and trucking regulation as an “empty box”—a justification that collapsed under examination. Firms convinced regulators that uncontrolled competition would produce destructive price wars, driving carriers into bankruptcy and leaving consumers with unreliable service.
Yet this notion failed to explain why competitive markets in other industries did not exhibit similar problems, or why antitrust law could not address genuine predatory pricing if it occurred. The excessive-competition rationale served primarily as intellectual cover for regulations that protected incumbent carriers from new entrants, while raising consumer prices.
The consequences of this mismatch were predictable. With the CAB suppressing price competition, airlines turned to other ways of attracting passengers, focusing on service quality instead.
Firms often react to price floors in ways that regulators fail to anticipate. Travelers from the 1960s and 1970s recall the unusually comfortable conditions of coach travel during that era—spacious seating, elaborate meals, and even piano lounges on some long-haul flights. These amenities were not the result of competitive efficiency but of regulation that set ticket prices above market levels. Unable to compete on price, airlines competed through costly service enhancements, scheduling frequent flights on popular routes that inflated operating costs and left many planes half empty. As Vietor noted:
Since capacity could no longer serve as a means of differentiation, the trunk carriers had to devise new means of service competition. “Capacity wars” gave way to “lounge wars.”
Those higher costs were then passed on to consumers through regulator-approved fares. Breyer’s framework explains why: the regulatory structure itself created the inefficiency by forcing competition into wasteful channels. Studies conducted after the Airline Deregulation Act of 1978 confirmed the high cost of this inefficiency, finding that deregulation saved consumers billions of dollars annually through lower fares and expanded service options.
The Public-Interest Standard and Its Pathologies
Breyer identified allocation under a “public interest” standard as one of the more problematic regulatory tools. The Federal Communications Commission’s (FCC) broadcast-licensing process demonstrated how vague statutory mandates produce arbitrary and inconsistent outcomes. The Communications Act of 1934 directed the FCC to award licenses in the “public interest, convenience, and necessity,” but provided no operational definition of these terms.
The FCC’s mission involved securing “good programming,” yet the agency faced an impossible dilemma. Breyer explained that defining specific content standards raised First Amendment concerns about government censorship, while avoiding content standards made it difficult to distinguish among applicants:
[T]he commission’s judgment of program quality must remain obscure, hampered by the nature of the issue, the lack of consensus, and First Amendment considerations that warn against entrusting such decisions to the government.
This tension between constitutional constraints and regulatory objectives produced what Breyer described as “ambivalence and obscurity” in FCC decisionmaking. The agency attempted to resolve this problem by developing objective criteria for license awards. In a 1965 policy statement, the FCC identified “diversification of control of the media” and “integration of ownership and management” as primary factors, reasoning that local owners who actively manage stations would produce better programming than absentee corporate owners.
Yet studies found these objective criteria bore no consistent relationship to programming quality. Breyer reports one study that discovered that greater local ownership and public-affairs programming were negatively correlated with receiving license awards—the opposite of the FCC’s stated policy objectives.
The conflict between objective standards and subjective judgment created several pathologies. Hearings for broadcast licenses typically lasted two years or more, as applicants presented elaborate evidence on numerous factors. The proliferation of criteria granted the FCC near-total discretion, while maintaining a facade of rule-bound decisionmaking. This combination produced inconsistent outcomes that bred cynicism among applicants, who increasingly relied on Washington lawyers with insider connections.
Breyer reported that the process became vulnerable to both the suspicion and reality of corruption, when valuable licenses depended on uncontrollable subjective discretion:
[T]he inability to perceive key factors, produced by inconsistent decision making, leads applicants to depend upon the views of insiders—the expert Washington lawyers or commission staff members—to try to learn what is truly important. They may act on rumor, suspicion, or guess about what individual commissioners feel, sometimes seeking academics for their boards of directors, at other times blacks or Catholics. The greater the importance of this inside knowledge, the more tempting it is for an FCC staff member to see his position as a stepping stone to a lucrative career in the specialized agency bar.
The result is unfairness, between applicants with greater and lesser access to inside knowledge and between equally qualified applicants who are treated differently. The result is unpredictability in decision making and uncertainty as to how one can obtain a license. It is also cynicism, as the public comes to believe that the articulated criteria are not the real ones. Finally, it is abuse of power, as the courts find it difficult to keep the agency within the bounds of its legislated discretion.
License renewal presented a particularly acute problem. Incumbents developed reasonable expectations of renewal after investing in station equipment and operations. The FCC historically favored incumbents with “adequate” performance records over challengers that promised superior service, reasoning that demonstrated adequacy outweighed speculative claims about future performance.
But courts challenged this practice as denying challengers genuine comparative consideration. The FCC’s difficulty in specifying how much weight to grant incumbency reflected the underlying impossibility of the public-interest standard. Given that no objective criteria could reliably predict which applicant would serve viewers best, the agency defaulted to stability and predictability.
Breyer’s analysis of the public-interest standard demonstrates how vague statutory delegations invite regulatory failure, regardless of agency personnel or procedural reforms. The problem lay not in administrative incompetence but in the mismatch between the tool (comparative selection based on public-interest factors) and the task (allocating valuable broadcast rights efficiently).
Breyer’s Methodological Limits
Breyer adopted what he termed a “conscientious regulator” perspective, analyzing what regulatory programs might rationally achieve, rather than explaining their political origins.
While the public-choice movement was already well-established when Breyer was writing, he deliberately set aside debates about agency capture and interest-group politics, focusing instead on the technical performance of regulatory tools. Some may view this as a limitation, but it serves a useful analytical purpose. By assuming that regulators were pursuing legitimate public objectives, Breyer was able to show that even well-intentioned and competently administered regulatory programs contained structural flaws that procedural reforms alone could not fix.
Breyer’s approach, however, cannot fully explain why obvious mismatches persist. If airline regulation was demonstrably inefficient, why did it endure for 40 years with staunch support from regulated carriers, labor unions, and congressional committees? Public-choice economists like George Stigler and James Buchanan offered answers that Breyer largely set aside: regulatory regimes create concentrated benefits for organized interests, while dispersing costs across consumers who lack similar organizational capacity.
Airlines and their unions earned rents from suppressed competition; passengers paid higher fares but lacked the political cohesion to demand change. Frank Easterbrook, writing in the Journal of Political Economy, argued that Breyer’s emphasis on technical regulatory reform underestimated the difficulty of overcoming entrenched political support for inefficient arrangements:
Breyer justifies his exclusive concern with justifications rather than with causes of regulation by saying that “arguments on the merits” must influence legislators, administrators, and judges, in some if not many cases. And surely he is right that justifications count. Even powerful groups cannot secure the passage of legislation that has adverse effects on other parties so great as to mobilize them to action, and sometimes interest groups’ interests coincide with the justifications they assert. What else explains welfare-increasing statutes such as laws against theft and murder?
Easterbrook’s criticism is a bit unfair, as Breyer gave a nod to public-choice considerations in discussing Sen. Ted Kennedy’s (D-Mass.) hearings on airline deregulation:
The airline issue was ripe for political action after it had become visible. Visibility seemed to depend on several factors. First, what publicity had the issue received? If a given issue is persistently called to the attention of the public, the politician feels he should study it. He will be asked where he stands, and to admit ignorance is to be open to the charge of not doing his job. Moreover, the politician may see direct benefit in becoming involved in a visible issue. He must consider whether and what sort of publicity the issue is likely to bring. In part, this concern is related to his need for reelection. His reelection depends upon his being seen by his constituents as performing effectively. And this perception requires both that he accomplish results and that the press reports his actions to his constituents. In fact, “accomplishment” as perceived by his constituents may be at least as important for attaining reelection and increased political power as is an attractive voting record. “Visibility” is thus closely related to “publicity.”
In other words, the hearings succeeded not merely because they demonstrated regulatory failure, but also because they assembled a coalition powerful enough to overcome opposition from beneficiaries of the status quo.
Vietor’s Positive Analysis
Vietor’s case studies of American Airlines, AT&T, El Paso Natural Gas, and Bank of America documented how firms navigated the transition from regulated to competitive markets.
Where Breyer provided the diagnostic framework, Vietor supplied the empirical narrative. His central argument was that competition in formerly regulated industries is “contrived”—actively shaped by strategic interactions among firms, regulators, and legislators, rather than emerging naturally when government withdraws.
American Airlines’ experience illustrated this process. Carriers faced unprecedented strategic uncertainty after the Airline Deregulation Act of 1978 eliminated CAB control over routes and fares. American responded by marketing its in-house computerized-reservation system, Sabre, to travel agents. By 1989, Sabre served 38% of the travel-agent market. By controlling this infrastructure, American could subtly bias search results toward its own flights, creating competitive advantages that substituted for the regulatory protection it had lost.
The U.S. Justice Department (DOJ) and other carriers later challenged these practices as anticompetitive, demonstrating that deregulation replaced one set of problems (regulatory inefficiency) with another (strategic behavior in newly competitive markets).
Contemporary Application: Broadcast-Ownership Rules
The Breyer-Vietor framework directly applies to the 2025 debate over the FCC’s broadcast-ownership rules. Applying Breyer’s method begins with the justification for the rules.
Historically, the FCC has limited how many television stations one company could own, both nationally and locally, to promote viewpoint diversity and localism. This was based on the problem of “scarcity”—in this case, the limited availability of broadcast spectrum. At the time, having more than seven VHF channels in a single market was technologically infeasible. In an era dominated by a few broadcast networks, these ownership caps were the regulatory tool chosen to prevent a handful of powerful voices from controlling the airwaves.
Today, the scarcity rationale is an “empty box.” The rise of cable, satellite, and countless internet-based streaming services like Netflix, YouTube, and Hulu means that the video market is characterized by abundance, not scarcity. As I noted in a previous post, if broadcasting were a new technology today, it is unlikely that these ownership limits would be created at all.
The result is a Breyer-esque mismatch. The regulatory tool—ownership caps like the 39% limit on national-audience reach—persists even though the perceived market failure it was designed to solve has vanished.
This mismatch creates significant economic distortions. The FCC’s rules impose asymmetric burdens, hindering broadcasters’ ability to compete with their largely unregulated digital rivals. While a broadcast company’s growth is limited by the national cap, a streaming service faces no such restrictions and can achieve national or global scale. This regulatory asymmetry prevents broadcasters from reaching the scale needed to compete for advertising revenue and high-quality programming, ultimately harming their ability to invest in the very localism the rules were intended to protect.
The Supreme Court’s 2021 decision in FCC v. Prometheus—authored by Justice Brett Kavanaugh—acknowledged this new reality, concluding the FCC had acted reasonably in determining the rules were no longer necessary to serve public-interest goals, given the dramatic changes in the media marketplace.
Vietor’s “contrived competition” lens reveals the strategic consequences of this mismatched regulatory landscape. The current market is not natural; it is an archaic structure shaped by decades of regulations and FCC rules. In response, broadcasters engage in strategic behaviors like joint sales agreements (JSAs) to achieve operational efficiencies that ownership caps would otherwise block.
Moreover, the entire system of broadcast regulation is interconnected. I noted earlier that relaxing ownership caps without also reforming retransmission-consent rules—which determine how cable providers compensate broadcasters—could alter bargaining dynamics in unpredictable ways and ultimately harm consumers. Deregulation is, therefore, not merely the removal of rules but a complex reconfiguration of market relationships.
A combined Breyer-Vietor analysis suggests the current ownership rules are counterproductive. The least-restrictive alternative, a core principle in Breyer’s work, would be to eliminate these technology-specific regulations and rely on general antitrust law to address any legitimate concerns about market concentration. This approach would allow market forces, rather than regulatory artifacts, to shape the industry.
Conclusion
Both books remain valuable because they reject simple ideological positions. Breyer did not argue that markets always function perfectly or that regulation necessarily fails. Rather, he implicitly adopts the “law & economics” approach by insisting that regulatory interventions be matched carefully to identified problems, and that less-restrictive alternatives receive consideration before policymakers resort to classical regulatory approaches.
Vietor demonstrated that deregulation involves more complexity than simply removing rules. In many cases, new competitive arrangements must be allowed through strategic interaction and institutional adaptation.
Read together, Breyer and Vietor offer an approach for moving beyond rhetorical debates and toward empirical assessment of specific interventions and their consequences.
For Further Reading
- George J. Stigler, “The Theory of Economic Regulation.” Bell Journal of Economics and Management Science 2, no. 1 (1971): 3–21. Stigler argues that government regulation is often “captured” by the industries being regulated, meaning that businesses use their political influence to get rules that benefit them, rather than the general public. His key insight is that regulation works like a marketplace where businesses with the most to gain will spend the most money and effort to influence politicians and regulators. At the same time, ordinary consumers have less incentive to get involved, because each individual consumer has less at stake.
- Richard A. Posner, “Theories of Economic Regulation.” Bell Journal of Economics and Management Science 5, no. 2 (1974): 335–58. Posner examines two competing explanations for why government creates economic regulations: the “public interest” theory (which assumes regulations fix market problems and help consumers) and the “capture” theory (which argues that regulations mainly benefit the regulated industries). He concludes that, while neither theory perfectly explains all real-world examples, the evidence shows that regulations often do serve industry interests. rather than protecting consumers. At the time, however, Posner indicated that more research was needed to fully understand when and why this happens.
- Sam Peltzman, “Toward a More General Theory of Regulation.” Journal of Law and Economics 19, no. 2 (1976): 211–40. Peltzman expands on Stigler’s theory by showing that regulators try to balance the competing interests of both businesses and consumers, not just serve one group completely. He demonstrates that politicians act like businesses trying to maximize their chances of reelection by carefully distributing regulatory benefits between producer groups (who provide campaign money) and consumer groups (who provide votes), with the final outcome depending on which group can organize most effectively and has the most to gain or lose.
- Sam Peltzman, Michael E. Levine, and Roger G. Noll, “The Economic Theory of Regulation after a Decade of Deregulation.” Brookings Papers on Economic Activity: Microeconomics 1989 (1989): 1–59. Writing in the wake of major deregulation in industries like airlines, trucking, and telecommunications during the late 1970s and 1980s, Peltzman and co-authors evaluate whether the economic theory of regulation can explain why these changes happened. They find that most cases of deregulation occurred as industry profits gained from regulation dissipated due to new technology or competition, making it no longer worthwhile to invest in maintaining the old regulatory system. The authors do, however, acknowledge that some deregulatory episodes don’t fit the theory perfectly.
- Nancy L. Rose., ed. “Economic Regulation and Its Reform: What Have We Learned?,” National Bureau of Economic Research Conference Report (2014). This book examines how government regulation of various industries—including several industries analyzed by Breyer and Vietor—has changed over time, and analyzes what lessons policymakers have learned from past regulatory successes and failures.
