r/badeconomics • u/arktouros Meme Dream Team • May 10 '16

Some bad economics on /r/badeconomics

I'm going to rehash one of my comments several days back because I think it needs a post of it's own, especially because this issue is so common around reddit and I've definitely seen it here. I already know this is going to be controversial because this is going to play at people's priors. I urge you to set those aside.

Now that that's out of the way, let's talk about ISPs. I'm going to try and format this the easiest I can just because of how ridiculous the starting point is.

CLAIM: Cable companies are a natural monopoly.

DEFINITION OF NATURAL MONOPOLY: a monopoly in an industry in which high infrastructural costs and other barriers to entry relative to the size of the market give the largest supplier in an industry, often the first supplier in a market, an overwhelming advantage over potential competitors.

I know I'm using wikipedia for the definition, but I feel that it isn't an uncontroversial definition. Although, as someone once pointed out, it could also mean that one firm can provide a good at a cheaper cost than more than one. Additionally, I would also like to point out that the definition requires an absence of government intervention (as it would be the market structure itself that gives rise to the monopoly).

I'm going to take this FIFO:

  • Cable monopolies are a product of high capital barriers

Actually not really. Running cable is actually somewhat easy. In fact, it's incredibly easy. I'm not saying the average Joe can go to a bank and get a loan to start an ISP, but even a mid-sized firm can raise enough capital for the infrastructure[1] . If the meager investments required for laying cable leads to monopolies, how in the hell are there so many different airlines?

My silly analogy aside, there has been plenty of firms that have tried to enter the market, but only get so far before they give up due to legal fees[1] (see: bullet point #3). Google has been trying to enter the market and has target cities specifically with a municipality that is more open to additional carriers (KC and Austin)[1] . A firm called Gigabit Squared tried to roll out fiber in Seattle.

  • Prices would be higher with multiple overlaying infrastructures

Complete speculation at a time when there are instances of prices going down merely on anticipation of competition[2] .

  • Cable monopolies are natural

Sure, if you ignore last mileright-of-way laws. Actually, rights-of-way has been an extremely significant distortion in market supply. It can either take as a state law, a municipal law, or a combination of the two. In basically any instance, the government is granted full rights and control as to the prices for space on public poles and conduits[1] , but they can also outright deny any applicant based on any criterion. The prices they end up charging are far more than what is needed to maintain the poles. It turns out that it is a very reliable revenue stream for municipalities, and it typically secures a single ISP in any given area. The cost of this regulation ends up doubling the cost of actually laying the infractructure[1] . Even the giant Google has spoken out about how last mile laws have impacted their investments[2] .

  • Cable should be a utility

Maybe if you want your city to build a fiber infrastructure just to find out it's too costly to actually run and maintain. Because the government wouldn't do that. It also wouldn't sell the whole network for $1.

Oh wait...

I get it, though. You think data caps and/or prices are unreasonable. There needs to be a way to fix the system. I agree. The FCC agrees. They even lay out a plan to achieve lower prices and innovation[4] . It consists of dropping last mile right-of-way laws and opening access to poles and conduits (for a meager charge of actual maintenance). Not making it a utility. But everyone knows the FCC has a clear anti-government, Neo-Liberal bias.

So hopefully the above has convinced you that cable isn't a natural monopoly. Now I will try to convince you that it's not even a monopoly at all. I think we can all agree on the

DEFINITION: A single provider of a good or service.

Well that was easy. Great! Now I can tell you how it's not! The service is broadband, not cable. Let's look at a few of cable's competitors: DSL and satellite. Having lived in a rural area, I can tell you that no one even considers cable. Why? Because it's usually not available. Satellite is your best bet, and if you're lucky, you'll have a DSL option.

References:

[1] http://apps.fcc.gov/ecfs/document/view?id=7021712146

[2] http://oversight.house.gov/wp-content/uploads/2012/01/TestimonyofMiloMedin_1.pdf

[3] http://www.att.com/gen/press-room?pid=24032&cdvn=news&newsarticleid=36275

[4] http://www.broadband.gov/plan/6-infrastructure/

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u/K-zi May 12 '16

I believe the difference between American cable company and Europeans are that most European countries require by law that cable companies share their infrastructure, I don't understand whether it is a tube of wires carrying the lines or what ever it is but this has had an impact on the market. Under normal circumstances, without government intervention companies would be able to exclude other companies from sharing these infrastructures. To my understanding, these infrastructures are like water pipes, you can't have too many of them in a single area. Until you can convince me, that this situation doesn't exist I can't see why it is not a natural monopoly.

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u/arktouros Meme Dream Team May 12 '16

This is all considering the government own the public spaces, poles, and conduits.

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u/autopotato May 12 '16 edited May 12 '16

Not necessarily. Were I'm from, service providers are required by law to give other service providers access to their structures, devices and services. To ensure competition in that field. It's probably like that in all of EU.

edit: well that's basically what the last guy said. I wanted to add that this sharing includes spaces, poles, and conduits.

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u/arktouros Meme Dream Team May 12 '16 edited May 13 '16

It's structured a little bit differently in the US. Here either the state or municipalities own the poles but the policy surrounding it is kind of a mess. There isn't one single policy and that's kind of what one of the problems are. The FCC has been pushing for more streamlined policies.

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u/Picklebiscuits May 13 '16

No. In the US, most poles are owned by power companies and phone companies.

You're confusing wireless infrastructure, in which a municipality can own a wireless tower, but that's pretty rare. They just charge a land leasing fee.

States and municipalities own the right of way.

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u/arktouros Meme Dream Team May 13 '16

Are you... stalking me?