Tag Archives: monopoly

05.16.2013 | Demand and Supply: Should Congress Unbundle Cable?

If I pay $100 for a 50 channel cable package, then choosing the 25 channels I really watch should cost me $25. Yes?

I suspect Senator John McCain agrees. But it might not work out that way if his legislative unbundling proposal is passed by Congress.

Currently, consumers buy cable packages that provide access to groups of programs. A typical bundle, this Comcast offer includes “over 160 channels…40 commercial free music channels …17,000 on demand choices” for “as low as” $49.99 for 6 months. In 2005, the average household watched only 15 of the 96 channels in its subscription and paid close to $600 annually.

So, would à la carte be better?

Demand:

According to academic studies, no one is sure if unbundling will save us money. One Temple University researcher unbundled cable packages into “7 mini-tiers by channel genre” and concluded that we would save 35 cents per household per month. On the other hand, one of 2 FCC studies concluded that unbundling would be beneficial but the other did not.

Trying to assess the impact on the consumer, economists have created alternative package scenarios. They have cited consumer surplus, transaction costs, “option value” and monopoly power. They list the other bundles we buy like season tickets and newspapers (a bundle of articles). They cite huge cable price increases and lack of choice.

Supply:

On the supply side, analysts refer to the high fixed costs that relate to the expense of wiring and establishing a network and then to the low marginal cost of expanding and implementing it. They remind us of programming costs and licensing fees. Unbundling could upset the revenue stream that facilitates the current industry structure. It could mean the demise of less popular channels. Or, it could encourage more productivity and new industry approaches.

So, with all of these demand and supply variables and more, how to decide whether unbundling makes sense? Maybe we don’t have to decide. One journalist suggests waiting for internet competition to upset the current market model.

Sources and Resources: While this WSJ article summarized the unbundling issues and alternatives most clearly, this academic paper has 51 pages of everything you ever wanted to know about cable TV and bundling. In addition, for lots more reading and the source of more of my facts, I suggest this New Yorker column, this Slate article, this Atlantic discussion and here is the McCain proposal. After reading it all, I can only say that the countless variables are all in flux because of technological innovation.

From “Unbundling Cable Television:An Empirical Investigation” by Dmitri Byzalov

Posted by: adminEcon
Tags: demand and supply, fixed cost, innovation, monopoly, unbundling cable TV packages, unintended consequences
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08.05.2012 | What Can You Learn From the Phone Book?

Among all of the innovations that changed our lives, have you ever thought about the phone book?

The first phone book dates back to 1878. Compiled by the the District Telephone Company of New Haven, soon to become SNET, the Southern New England Telephone Company, it had 50 names but no phone numbers because the first phones had no numbers. Its purpose was to list phone owners so that people knew with whom they could talk through a central switchboard. One early version of the phone book suggests saying “Hulloa” to start a conversation although Alexander Graham Bell preferred “ahoy.”

Reading about the phone book, I soon realized that it conveyed a lot about our economic history. Soon after New Haven, Connecticut, then San Francisco, New York City and Chicago printed the earliest phone books. During 1916, researchers were asked to figure out the best way to organize a phone book. Experimenting with 3 or 4 columns to a page, font size, indentations, they actually figured out a format that shortened number look-up time to 9.28 seconds. According to a 1954 edition of The Saturday Evening Post, the larger phone books, maybe 2000 pages, cost AT&T $1.50 to produce. And remember, millions were printed and delivered, they were in almost every home, and no one directly paid for a copy. Or, just skim through the 1979 Yellow Pages. You find, for example, plenty of listings that relate to the typewriter and none that say computers.

And that takes us to Joseph Schumpeter. Schumpeter characterized the unsettling process through which innovations replace established technology as creative destruction. The computer replaced typewriters. The auto eliminated the need for buggy whips. Because of CDs, 78 and 45 rpm records became obsolete. Stepping back, you can see that creative destruction fuels massive economic shifts, it eliminates existing jobs and it necessitates new kinds of labor and capital.

With the proliferation of cell phones, aren’t phone books undergoing creative destruction? Is anything replacing them?

And lastly, a painting contractor whose name was Bill Holland, hoping to be easily found, listed his name in the 1960s Los Angeles Yellow Pages as Zachary Zzzra.

My phone book facts are from Ammon Shea’s The Phone Book. And here is an interesting Washington Post article on the future of the phone book.

Posted by: adminEcon
Tags: Alexander Graham Bell, Ammon Shea, at&t, creative destruction, economic history, innovation, Joseph Schumpeter, Manhattan phone book, monopoly, the phone book, white pages, yellow pages
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07.27.2012 | A Blurry Customer Focus

Several years ago, I walked into my local bank branch at 5:55. Knowing that they closed at 6:00, I thought I had some time but they said I was too late. I said I had 5 minutes, they said no and by the time we had concluded our exchange, it was 6:00. They said they were closed and asked me to leave.

Fast forward to 2012. In a news article, bank analyst Richard Bove told how his mismanaged mortgage application, discourteous tellers, and fee problems made him decide to switch banks from Wells Fargo to Chase.

But…

Recommending Wells Fargo, in a research report, he said, “I’m struck by the fact that the service is so bad, and yet the company is so good.” Rather than customer courtesy, the bottom line grows from “pushing products and managing risk.”

His bottom line resounded. Recalling a recent post on Pepco’s lack of reliability during a week long Washington D.C. power outage, I again pondered what happens when better service has no impact on profits.

I also wondered in which market structure customer service might be most important. (Moving from more to less competition and from smaller to larger businesses) Perfect competition? Monopolistic competition? Oligopoly? Monopoly?

Any similar experiences? Please comment.

Dick Bove’s experience is described in this NY Times article, and here is an abstract for a Harvard Business Review report that concludes delighting customers won’t create loyalty but solving their problems will leave them satisfied.

Posted by: adminEcon
Tags: competition, competitive market structures, customer service, monopolistic competition, monopoly, oligopoly, opportunity cost, perfect competition, profit, Wells Fargo
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03.25.2012 | The Norwegian Butter Crisis

Reserves were low, demand was high and prices skyrocketed. No, not oil.

Butter.

Butter demand surged in Norway several months ago when a low carb high fat diet swept the nation. At the same time, the supply of butter plunged because wet weather diminished the quality of livestock feed. Worse feed meant less milk.

You see where this takes us. More demand, less supply, and not only will price rise, but for Norway, it also meant a devastating butter shortage.

Here, Stephen Colbert tells the whole story of Norway’s butter crisis and a Russian butter smuggler.

The Economic Lesson

Usually, Norway represents a happy economic story. Endowed with immense oil wealth, they used the proceeds wisely by establishing a Government Pension Fund to invest in the future. Recognizing the possibility that the value of their currency would soar because of oil demand, they discouraged people from buying relatively cheap imports by protecting domestic industries. One result was a dairy cooperative monopoly. So, when the butter crisis hit, there was no way to get extra butter until tariffs were lowered. Until then, supply contracted and demand soared.

As you can see, Norway’s butter crisis is a economic tale of oil wealth, monopoly, tariffs, supply and demand.

Here, Slate tells the whole economic story.

An Economic Question: How would a demand/supply graph represent the Norwegian butter price spike and quantity shortfall?

Posted by: adminEcon
Tags: butter crisis, demand, monopoly, Norway, oil, Stephen Colbert, supply, tariffs
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03.03.2012 | You’ve Got Mail?

While the U.S. had postal services since the 1600s, Ben Franklin transformed the system. Appointed Deputy Postmaster for the Colonies by the British, he established our first home mail delivery system, diminished to a single day the letter delivery time between New York and Philadelphia, and to 6 days between Philadelphia and Boston. When the British fired Franklin for his rebellious political activity, the postal system was making a profit.

Is it possible to bring Ben Franklin’s spirit to today’s USPS?

More than 2 years ago, the Washington Post expressed an answer. Comparing creative innovation from a privatized Swiss system to tired thinking from the USPS, they said we are dealing with a hybrid entity “hamstrung by a large and heavily unionized workforce, congressional management, and an antiquated business model.” We could add that George Mason economist Tyler Cowen tells us that we have been sacrificing new ideas and cost efficiencies because our Postal Service is a “privileged quasi-monopoly.”

A Postal Fact: 12345 is GE’s zip code in Schenectady, NY

The Economic Lesson

A controversial idea: Defined on Planet Money, a public good is “something that we all need that will make our lives better, but the market will not and cannot provide.” One podcast example of a public good was the benefit provided by a lighthouse. Maybe the US Post Office is very different from a lighthouse.

An Economic Question: Should mail delivery be a public good?

Posted by: adminEcon
Tags: Benjamin Franklin, lighthouses, monopoly, public goods, USPS
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