[e2e] It's all my fault

Ted Faber faber at ISI.EDU
Fri May 18 11:07:14 PDT 2007

On Fri, May 18, 2007 at 03:46:45AM -0700, Vadim Antonov wrote:
> On Thu, 17 May 2007, Ted Faber wrote:
> > On Wed, May 16, 2007 at 07:33:03PM -0700, Vadim Antonov wrote:
> > > The real role of the government in the history of the Internet was
> > > stalling, obfuscating, and supporting monopolism.  If not for the
> > > government-propped monopoly of AT&T, we'd see widely available commercial
> > > data networks in early 80s, not in 90s - the technology was there.
> > 
> > Governments do not support natural monopolies like the telecom network,
> > because they have no role in those monopolies.
> Now we got into the Alice's Wonderland, I guess. No role? Huh? FCC does
> not regulate telcos? Since when? Can I dig in a cable into the ground
> without asking various government busybodies first? What about the land
> grants and easements for the cable plants? What about patents?  What about
> "lawful access" requirements? What about Public Utility Comissions and
> their price-fixing? NO ROLE???

No role in their creation.  I left the phrase out buy it's clear from
the rest of the paragraph.  If the market could control, them all that
regulation would be unnecessary.

The difference between our positions seems to be that you think that the
government protects telecom monopolies for a piece of the action
(creating/protecting a monopolist) rather than coercing an established
and inevitable monopolist into taking actions counter to their interest
in order to not be actively broken up.  They're different in that the
removal of regulation has very different effects - a protected
monopolist (a sugar grower in the American South) is forced to compete
(and likely lose); a threatened monopolist returns to control of a
market, and service to customers and society likely degrades.

> > Significant economies of
> > scale and high capital barriers to entry will shut other providers of
> > similar services out of the market completely.  Even without aggressive
> > action by the providers, this leads directly to monopoly.  That's a
> > property of the market, not a government imposed attribute.
> Economics 101 - natural monopoly (aka single provider) and monopoly are
> not the same. By far. The "natural monopoly" cannot exploit consumers by
> raising prices or by reducing services using its "monopoly" position
> because doing so will create opportunity for entrance by a smaller
> competitor.

Prefacing your statements with contempt makes them no more accurate.

Again, a natural monopoly is a market that has significant economies of
scale, large capital barriers to entry, and no close substitutes.  It is
a kind of market, not a kind of firm.  It's probably not covered in your
101 text, though it could be; the concepts are not that difficult.

Imagine that the market starts with an arbitratry number of firms, the
first one to gain an edge will win the game with marginally correct
play.  As soon as one firm gets larger it can undercut another beyond
the point of profitability and devour its customers.  Then it is *more*
efficient (economies of scale), and takes on the next one. Eventually it
stands alone.  Then it can very easily eat anyone else that appears by
undercutting their prices and buying their capital.  If anything this
is worse in telecom, because the thing the firm sells is access to other

All the telecom regulation that exists interposes itself to make that
process difficult - again it is competitors who are assisted, not the
monopolist.  It forces large telcos to give smaller competitors access
to the larger firm's customers across their wires at rates the large
firm cannot set.  Without that, there would be one telecom company.

That's what the term "natural monopoly" means; not that there happens to
be one provider, but that without non-market action, a single provider
will dominate that market by the properties of the product being sold.
External actions prop up competitors or force monopolist actions.

> Real monopolies which depend on government enforcement of its "rights" can 
> deter competition and thus can exploit consumers.

Any sizable telecom entity would be significantly more profitable
without regulation.  It is the government that forces them to share
their plant with competitors rather than using it as a barrier to
protect their revenue stream.

> In fact, scale is not an issue whatsoever. No matter how large a "naturaly
> monopolistic" company is, it is always possible to borrow enough capital
> to create a comparably sized company. The history of Internet fiber glut
> demonstrates that pretty conclusively.

Capital's a market, too, and I don't believe an intelligent investor
would decide that attempting to overthrow a provider serving a natural
monopoly with all its natural advantages would be the best way to invest
their money.

What you suggest is not mathematically impossible, but I believe it to
be extremely unlikely.

> > Furthermore, all recorded cases of natural monopoly have evidenced
> > aggressive action; providers in natural monopoly situations crush
> > competitors and resist changes to their market.
> [B == vigorous]
> "B" means innovation, price cutting, and otherwise serving customers 
> better. This is _good_. If somebody seres customers much better than 
> anyone else could, then it is the best possible outcome for customers.

You're assuming that the market would sustain more than one competitor
indefinitely.  A natural monopoly will not.  It is to try to inject
these aspects into a natural monopoly that the government props up

I'll beat this dead horse once more in the hope you'll read it

	Once I've laid my plant down, every call/packet that I collect
	cash for has a lower marginal cost than the previous one.

	The largest provider can spread that cost over more customers,
	which means lower costs per customer.  Once my fixed costs are
	covered, per call/packet fees are largely profit.  Mmmm
	economies of scale.

	I can undercut the rates of other providers until they lose all
	their customers or go bankrupt.  If necessary, I can forgo any
	profit at all until competitors fail.  As you've argued other
	places, a packet's a packet and a call's a call, so as long as
	I'm not actually incompetent my lower rates win.  And, of
	course I'll make it more expensive for competitors to access my
	customers, if I allow it at all.

	Having secured that monopoly, these customers get monopoly rates
	and are a sink over which losses in markets one wishes to
	compete in can be amoritized.  Yes that's illegal - darn that
	government, the market would allow it.

	A new competitor has to buy enough plant to compete, which is
	costly.  Investors, seeing what happened to the last
	competitor, are probably hard to find, which is too bad.
	Building a telecom infrastructure is a high barrier to entry.

Governments regulate these guys because there's no incentive to
innovate - or once the competitors are gone, to provide low price
service.  The threat is to the monopolist to give something back to the
society or be broken up by the government, not a promise to ward off
competitors in exchange for a piece of the action.

> > Why would they do differently?
> Yes, why would they when they can buy enough politicans to do a joe job on
> potential competition instead of competing fairly.

Fair competition means monopoly here.  You start buying politians to
interfere when you know you'll lose in the market.  I was looking for an
example of this, but you were kind enough to bring up MCI below.

> > If US telecom were really deregulated tomorrow - no requirements to
> > share infrastructure, no limits on size, no service requirements -
> > there'd be one phone company in a decade at the most.
> I'm sure they told exactly the same nonsense when MCI tried to break the 
> long-distance market open.

Without the government forcing AT&T to allow access to its
customers/network for MCI, they had at best a niche market.  This is a
clear case of the government creating competition where the market would
have killed it.

AT&T owned the network and denied MCI access, in exactly the way a
trucking company might deny access to a competitor (yes, yes, there are
common carrier laws, but they're the result of the same process -
government regulation of a natural monopoly for a social good).  MCI
invested in politicans and lawyers and forced access to that network.

It's MCI's "rights" that are being created by the government here, and
the threat was to AT&T.

> > It's hard to see how you can characterize this as monopoly protection.
> Monopoly protection requires actual or threatened violence. In the modern 
> world only governments do that at the large scale.

And that threat - to the competitors - is compeletely absent here.

It is the monopoly that is consistently threatened.  The threat is not
"do as we say or we'll lower a tariff and let your competitors at you"
it's "do as we say or we'll break up your monopoly by force."

> > You couldn't lease a T1 before the government made AT&T lease you one -
> > an action I'm surprised you don't characterize as the government
> > stealing AT&T's capital.
> Yep. Considering that the government made AT&T a monopoly, that sure is a 
> relief.

We completely disagree on whether than monopoly was "made" or
"recognized as inevitable," but again, the threat is action against the
monopolist, not lowering a government restriction on competition.  If
the monopolist sees being forced to sell services that it can provide to
a competitor as protection, I assert that's a foolish monopolist.

> > It's a lot more difficult to build a nationwide (to say nothing of
> > worldwide) data network if you have to spend the capital to run the
> > lines.
> Hard, not impossible. Many companies have done that.

Name one that's been the *second* company.  Remember, government
subsidies - including letting a competitor use the monopolist's capital
- are cheating.

> > Now, I don't think that the government had a coordinated plan to create
> > a new market, but without the (accidental) confluence of those actions,
> > the Internet would be unlikely to emerge.
> Governments do not create markets. They cannot. Markets are created by the
> acts of voluntary exchange between people, and precede governments by tens
> of thousands of years. (Heck, even apes do some trading among themselves).

Of course they can.  Governments have a lot of money and use it to buy
things.  Catalytic converters and smog check stations are unlikely free
market outcomes.

For that matter, there's this:

Ted Faber
http://www.isi.edu/~faber           PGP: http://www.isi.edu/~faber/pubkeys.asc
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