The normally rather good David Cay Johnston has a rather puzzling piece about the Charter, Time Warner possible deal going on. It’s puzzling because he’s right that monopolies are not something that we desire to have in our economy but when we talk about monopolies we have to be very careful indeed over what we’re identifying as a monopoly. This also extends to the rather looser definition of an oligopoly. This isn’t a detailed examination of the cable and or broadband market: rather it’s an explanation of a basic economic truth, one that we do really have to be careful about in public policy, that before we can deal with monopoly or oligopoly then we’ve got to identify them correctly. Which is something that Johnston is not in fact doing here.
The basic background is entirely correct. Monopolies are a bad thing. Sometimes they’re unavoidable, there really is such a thing as a natural monopoly. The answer there is careful market design and careful market regulation: because whatever else we do a natural monopoly is just that. It makes sense for something to be provided by just that one provider. Sewage pipes in an area for example: there’s really no point at all in insisting that there should be two such sets of pipes so that we can have market competition. The costs of doubling that infrastructure will be vastly higher than whatever gains we might make from the competition.
There’s also the case of contestable monopolies. One that often gets misunderstood here is Rockefeller’s Standard Oil. Yes, they had a near monopoly. But they were also aware that if they then tried to exploit that by raising their prices then competition would arise anew. So, they didn’t raise prices. Consumers got the efficiency of that single supplier as a result of the potential for competition if the monopoly was abused. This is the mistake that China made with rare earths in 2010. They didn’t realise how quickly competition would arise as a result of their attempts to exploit their near monopoly supplier position. Five years later rare earth prices are lower than they were when China started. Attempting to exploit a contestable monopoly is just one of those things that doesn’t really work.
Is it possible that there’s a monopoly, or an oligopoly, in cable and or broadband provision in the United States? Sure that’s possible, but Johnston hasn’t identified it:
This week, Charter Communications announced plans to buy Time Warner Cable as well as the much smaller Bright House Networks. These actions illustrate the increasingly sclerotic condition of the American economy.
Instead of enjoying the benefits of competition, America suffers from ever more concentrated ownership of vital, privately owned infrastructure. This deal, if approved by regulators, would make this problem even worse.
Not so much really:
If the Federal Communications Commission lets the cable deal go through, then Charter will control almost 30 percent of broadband Internet service. The company would enjoy the benefits of operating as a monopoly or part of a duopoly, free to charge much higher prices than a competitive market would allow.
If there is a monopoly in such services it’s not at the national level that it exists. Far more important, in fact the only level that is important for our public policy reasons, is that the monopoly largely exists at the local level:
Broadband policy discussions usually revolve around the U.S. government’s Federal Communications Commission (FCC), yet it’s really our local governments and public utilities that impose the most significant barriers to entry.
You can pick any ISP you want… as long as it’s Comcast. In the United States, many of us have no choice whatsoever in the way of broadband ISPs. Plenty of localities are more than happy to offer monopolies to mega-corps, and that means competition is effectively nonexistent in those areas. Price hikes, stagnant speeds, and other bad behaviors are free to run rampant, and there’s not a damn thing you can do about it.
That quote accurately describes the situation in the United States today, where vigorous competition is almost non-existent. In some big cities, broadband consumers have a choice between a cable operator, such as Comcast, and a telephone provider, such as Verizon. But that’s practically no choice at all. Although the cable and telephone companies spend huge sums of money on advertising trying to lure each others customers, they rarely compete on price. To use the economic jargon, they act as a cozy “duopoly,” keeping prices well above their costs. Many people, myself included, don’t even have two options to choose from. On my block in Brooklyn, Verizon’s high-speed FiOS service isn’t available yet, so I’m stuck with Time Warner. (And, no, they don’t rush out to repair the frequent outages.)
The truth is that the broadband internet service providers in the US are monopolies, controlling numerous and huge service areas without real competition and without real consequences for their actions.
The problem is that there is a monopoly (or at best, an oligopoly) here. But it’s not something that matters at the national level. What matters is monopoly at the local level. And to some extent (not entirely, high density areas will support more than one physical network, but the average US suburban area probably won’t) this is because service in a local area is a natural monopoly. It costs a certain amount of money to wire up an area. That then has to be paid for out of the number of people who sign up to the wiring. The less densely populated an area the higher the percentage of the locality has to sign up to make it worth doing that wiring in the first place. This is entirely akin to our sewage pipes and having two networks. Natural monopolies are a real thing that we must understand.
There is indeed a solution to this:
The same is not true in Japan, Britain and the rest of the rich world. In such countries, the company that owns the physical infrastructure must sell access to independent providers on a wholesale market. Want high-speed Internet? You can choose from multiple companies, each of which has to compete on price and service. The only exceptions to this policy in the whole of the 32-nation Organization for Economic Co-operation and Development are the U.S., Mexico and the Slovak Republic, although the Slovaks have recently begun to open up their lines.
Just as the UK does with the electricity grid for example, another natural monopoly. Anyone can (well, OK, you’ve got to meet certain technical standards) pump electricity into the grid. Anyone can set up to do retail supply of electricity from that grid. The grid itself though, the high power lines that transport electricity around the country, that’s a natural monopoly. So, it’s regulated as to prices and must offer than open access at both ends of the system. British Telecom’s network of telephone exhanges is regulated in much the same manner.
Which brings us back to US broadband. Would this deal under discussion increase the concentration in the industry? In one manner, in a most unimportant manner, yes. One company would have that 30% of the national industry. But that’s near supremely unimportant. What matters is that in each locality the broadband market is a monopoly, or usually at best a duopoly. And that’s where the action, the public policy, should be concentrating. That someone in Denver buys their broadband from a different company than someone in Detroit does just isn’t the point. To have competition we want the people in Denver and the people in Detroit to have companies competing for their custom actually in Denver and Detroit.
That is, if there is a monopolistic problem here it’s a geographic one, based on locality, not something concerning the national market. And as we don’t like monopolies, that’s the monopoly that needs to be broken.
Who has how much of the national market just isn’t important. Competition only works if consumers actually have a choice: so choice in each area is what is needed, not a worry about who owns what percentage of the local monopolies. Another way to put this is that it’s the local monopolies that are the problem. So that’s where the public policy attention needs to be.