Relay-Version: version B 2.10 5/3/83; site utzoo.UUCP Path: utzoo!mnetor!seismo!lll-crg!nike!ucbcad!ucbvax!CSVAX.CALTECH.EDU!ametek!walton From: walton@ametek.UUCP Newsgroups: mod.politics Subject: Monopolies Message-ID: <12228206385.23.MCGREW@RED.RUTGERS.EDU> Date: Mon, 4-Aug-86 17:43:52 EDT Article-I.D.: RED.12228206385.23.MCGREW Posted: Mon Aug 4 17:43:52 1986 Date-Received: Tue, 5-Aug-86 23:24:11 EDT Sender: daemon@ucbvax.BERKELEY.EDU Reply-To: ametek!walton@csvax.caltech.edu Organization: The ARPA Internet Lines: 95 Approved: poli-sci@red.rutgers.edu (I know I said I didn't have time, but I can't resist replying to this, from Poli-Sci V26 #3). Keith Lynch writes: Right. It was said that the long distance phone rates were high because rural customers were being subsidized by urban customers. And that if competing long distance firms were to be allowed, that rural rates would hit the ceiling. Well, rival carriers WERE finally allowed, and rural rates have gone DOWN, as have urban rates. AT&T discovered that they COULD lower their rates, if they needed to to stay in business. Wrong. Long distance phone rates were being used to subsidize local service for everyone, urban and rural. The difficulty was that said high long distance rates were primarily being paid by businesses who discovered that they could set up their own, private, long distance service. Now, local rates are going up, deprived of their subsidy. I don't know about anyone else, but my phone bill is in fact higher than it was, because the decrease in the cost of my long distance doesn't make up for the increase in the cost of my local service. I just paid $37.50 to have my phone service moved to my new address; that used to be free (in the sense of being included in my basic monthly service, which is some $10 per month). Now if only they would allow competing LOCAL phone companies! There used to be such. But it wasn't very good. Can you imagine the VHS vs. Beta vs. 8mm video competition extended to telephone service? You fail to take account of the (admittedly few) cases where a given course of action benefits everyone, but in a way which is so diffuse that no one person benefits enough to make it cost-effective for them to take the action first. To draw an analogy, clearly the motorists on the LA freeways (where I live) would be better off if they car-pooled. Even if they each found only 1 other person with whom they ride-shared once a week, it would reduce the number of cars on the road by 20%, which would eliminate rush-hour traffic jams (evidence: a decrease of 4% during the Olympics eliminated most of them.) But, if only a few people car pool, they give up the freedom of choosing the time they arrive, the time they leave, and where to go for lunch, AND do not benefit from a reduction in the number of cars on the road, because it isn't large enough to make a difference. So no one car pools. One of the main points that opponents of pure capitalism often make is that without government, there would be nothing to prevent monopolies from forming and driving up prices and reducing quality. Well, they are certainly correct that monopolies drive up prices. And that they reduce quality. But the only way monopolies can exist is if government mandates it. Not true. Telephone and electric power are two examples of what economists call "natural monopolies." They are called that because, based on the available empirical evidence, it is always possible for the largest company to offer the cheapest service. In most industries, a given firm has a natural size, namely the one which minimizes its cost of providing its goods or services, and that size is such as to allow several competitors. If the size of the company increases, its costs either remain the same or actually go up. This doesn't appear to happen with telephone or electric service, hence the term "natural monopoly," because the largest company can ALWAYS undercut its competitors' prices, drive them out of business, and then raise prices to monopoly levels. In the 19th century, many railroads had a monopoly over their service area, since the government gave them land for free and forbid any other railroad from operating in the area. It is ironic that the resulting bogus price structure was blamed on capitalism, rather than on government interference. I know of no reputable economist who disputes the fact that the Interstate Commerce Commission was responsible for said "bogus price structure." People who believe otherwise cannot prove their case. Today, most areas have monopolies in local phone service, electric power, and water. There are a few places with competing phone service and/or competing power service, and the prices for those services is generally much lower than where they are a monopoly. Name one. I believe you give too much credit to the enemies of capitalism, and that you do capitalism a disservice by refusing to admit that while it is the best possible economic system, it is not perfect. The latest Time magazine documents the fact that capitalism seems to be spreading in the Third World; they've tried the Soviet centrally-planned model and found it just doesn't work. To which I shout, "Wonderful! GREAT!" But let's not ignore a few flaws, such as the natural monopolies described above, flaws to which I see no remedy other than government intervention in the market. Steve Walton -------