I mentioned yesterday that Duopoly in and of itself isn’t a problem. I want to dig deeper into that.
Going back to Lowrey’s original piece
Granted, Verizon and Sprint could enter into a price war with AT&T, much to the benefit of the average smartphone user on the street. Low-cost carriers like Leap and MetroPCS could chip away at the big companies’ business. But it seems unlikely to change the dynamics for the average consumer. Wireless is a resource-intensive business with serious barriers to entry, making it hard for small and local companies to compete at a national level.
Another way you might say this is that providing the services that consumers want is expensive. You sometimes here the complaint that wireless service is too expensive. Though, I think small low cost carriers do serve a to fill in that niche.
However, an equally pressing complaint is that the service sucks. Its not expansive enough, its not fast enough, I still have to have both a cable line and wireless service to get decent internet.
These are the kinds of problems that big companies can solve and they may in fact need to charge higher prices on a larger customer base to do it.
The primary concern with allowing a full monopoly is that is will actually reduce service.
Private companies, even monopolies, can’t force you to buy things. What they can do is offer crappy services or bloated packages that you wouldn’t want to buy if you had a reasonable choice. In some cases they can scale back service provision all together. This allows them to target their price at only a subset of the population, which indeed can bear higher prices.
However, this is precisely why any competition matters. For monopoly to work you have to restrict the customers options. Another competitor, even one other competitor, will then have the opportunity to take advantage of that.
Now, there is concern that with only two companies they could give each other a wink and a nod, agreeing that neither one will be aggressive about expanding service. This form of tacit collusion is what makes highly concentrated industries dangerous.
However, it also what makes complaints from smaller companies an encouraging sign. If the big boys were really scaling back that would make more room for the little guys even if the little guys couldn’t entirely fill the gap.
When you want to screw the customer by abusing monopoly power that’s actually good for your competitors. When you want to build a behemoth that attracts every customer on earth, that’s bad for you competitors. However, its good for consumers because they wouldn’t be attracted to the behemoth unless it was offering better services than the current disintegrated companies.
In short the problem with monopoly is not that they offer too much to too many, but that they offer too little to too few. They can get away with this because there is no competitor to fill in the gaps.
Based on the evidence I’ve seen there doesn’t seem to be a strong likelihood of this happening in the telecom mergers. There could be some secret deal between Verizon and At&T that I don’t know about, or some more complex scheme to shut down innovation. However, I haven’t seen that evidence.
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Wednesday ~ March 23rd, 2011 at 11:53 am
IVV
I agree that duopoly in and of itself isn’t a problem. On paper, I totally agree, duopoly is just fine and helps out a lot.
However, in practice, and with telecommunications companies in particular (such as cable), duopoly looks more and more like a carefully shared monopoly. So although it’s quite possible that we won’t see a increase in consumer cost or relative decrease in consumer utility, that’s not what personal experience suggests. I remain skeptical.
Wednesday ~ March 23rd, 2011 at 1:13 pm
Matthew Yglesias
I think the problems with this merger, if there are problems, are more likely to come on the other side of the transaction. If you have only one nationwide GSM operator (AT&T) and only one nationwide CDMA operator (Verizon) then phone makers (Apple, Motorola, Nokia, etc.) are going to be in a much weaker position than they are in the two of each paradigm. This is where the opposition to the merger is going to be concentrated.
Wednesday ~ March 23rd, 2011 at 1:32 pm
JazzBumpa
To IVV’s point, the fact that you aren’t seeing evidence of anything overt is a pretty thin argument. Unless you are a specialist in that field, how would you even know what to look for? And there doesn’t need to be a “complex scheme to stifle innovation. ” The mere absence of meaningful competition can enable a shared innovative laziness.
Wireless is a resource-intensive business with serious barriers to entry, making it hard for small and local companies to compete at a national level.
Another way you might say this is that providing the services that consumers want is expensive.
Not necessarily. A large initial capital investment is a barrier. Continued operations and extra services might then be very cheap incrementally – and highly profitable. You have to think about fixed vs variable expenses, lumpy assets, etc. Your conclusion is possible, but not assured.
Cheers!
JzB
Wednesday ~ March 23rd, 2011 at 8:26 pm
JazzBumpa
Quoting myself:
The mere absence of meaningful competition can enable a shared innovative laziness.
Case in point, the U.S auto industry in the 60′s and 70′s – even into the 80′s, when there was no meaningful foreign competition, and the market was sliced up between two big players – GM and Ford, and minor players like Chrysler and AMC.
That’s four, which is more than 2. There are big barriers to entry. product and service improvements could have been made without a great deal expense or even effort, but the groupthink in the industry was quite gripping.
When “made in Japan” stopped being a joke, the car companies had to start doing things right. The fact that they had a great deal of difficulty in figuring this out somehow became the fault of the Unions, of course.
So it goes,
JzB
P.S. My argument is for competition – which corporations hate – not globalization
Thursday ~ March 24th, 2011 at 3:13 pm
Sohier
Karl,
Your posts on the merger have really, really bothered me and I couldn’t figure out why for a while. I think it’s because I generally find your blog posts to be interesting and well informed, yet on the subject of monopoly you have been lazy and lowered the level of the conversation. You’ve ignored the extraordinary barriers to entry in the cell phone market, ignored the network effects that truly make monopolies dangerous and ‘natural’ in certain industries, and offered truly sloppy thinking on the game theory strategies for the players in a duopoly. Your argument you’ve made- that telecoms is a resource intensive business and that therefor the product will be expensive- has zero bearing on how expensive the product is *relative* to what it would be in a competitive market. Methinks you need to do more reading on game theory and agent based modeling.
I can’t help but wonder if the flaws in your analysis come down to an inability to understand how to effectively exploit a system. Many economists don’t, which is why they don’t understand the real behavior of companies.