Saturday, September 03, 2011

The Natural Forces of Market Concentration

Country  HHI Index, 2009  
China6,772
Portugal5,843
Switzerland4,296
South Africa4,152
Turkey4,076
Japan3,591
Spain3,401
United Kingdom3,401
Russia3,383
France3,346
US - Proposed3,320
Canada3,247
Italy3,243
Israel3,115
Germany2,936
Australia2,853
Taiwan2,801
US - Now2,744
Argentina2,499
Brazil2,396
India1,614

NEW YORK TIMES -- "The [AT&T-T-Mobile] merger would increase the concentration of the cellular industry in the United States to 3,320, by the Herfindahl-Hirschman Index (HHI, a measure of market concentration), up from 2,744 before (see chart above). But note that even if AT&T does not acquire T-Mobile, the American wireless market is and will remain highly concentrated. An international comparison of market concentration, published this week by the Columbia Institute for Tele-Information, shows that the wireless markets in most nations are highly concentrated. 

In fact, the merger would move the United States from “toward the bottom to well in the middle of the pack” in terms of consolidated market power in the wireless industry, said Eli Noam, an economist at the Columbia University Business School and director of the telecommunications research institute (see chart above).

In telecommunications, the market concentration itself is not surprising. The telephone business, after all, has long been one of the classic examples of an industry that exhibits the forces that lead toward “natural monopolies,” or at least oligopolies. Those forces include high fixed costs — the investment needed to build out networks — and the efficiencies that come from providing services to millions of customers.

The drive to build out more sophisticated, higher-speed wireless networks will considerably increase the capital costs for network carriers. “That will almost certainly increase the natural forces of market concentration,” Mr. Noam noted.

MP: Maybe it would be best that the Department of Justice do nothing about the ATT-T-Mobile merger. As long as there is open entry to the wireless services industry, and the incumbent firms have no legal protection against current or future competition, what's the problem? The natural forces of market competition are usually the best and most effective forms of regulation.

Update: Don Boudreaux argues in this video that the proposed merger between AT&T and T-Mobile would make the wireless market more competitive, benefiting consumers.

20 Comments:

At 9/03/2011 1:22 PM, Blogger Buddy R Pacifico said...

Many literary works that support and promote competition in the marketplace highlight the terms choice or choose.

Par example:

"Free to Choose" by Milton Friedman; Friedman's biography "The Power to Choose"; and "The Choice by Don Boudreaux's collaborator, Russ Roberts.

The government is pushing choice, which is different than those at the top of the telecom concentration rankings. Does not more choice allow consumers to choose better consumptive goods and services?

 
At 9/03/2011 3:16 PM, Blogger Larry G said...

here's a chart I would love to see:

average household electric bill vs average household cellular (or cable) bill!

:-)

 
At 9/03/2011 3:47 PM, OpenID Sprewell said...

And what do you or Boudreaux know about the cellular or telco markets to make such a judgement? Do you know that spectrum today is vastly underutilized, as these oligopolists buy more and more of it from our worthless govt, only to squat on it unused? It seems to me that you and Don know little about the actual mechanics of this issue, but are perfectly willing to argue dumb "leave them alone" positions. These oligopolists have so much power precisely because the govt fucked up the property rights over landline rights-of-way and wireless spectrum for the last century. Arguing that they should then keep their hands off the resulting oligopoly isn't just clueless, it's idiotic.

If you get the property rights laid out right, there's no reason both wired internet and wireless can't be highly competitive markets. The most commonly-used wireless technology today by far is wifi, which falls under license-exempt spectrum, ie you don't need a license to start running your own wifi router in your house or workplace. Rethinking how we regulate these crucial markets isn't done only because people like you accept dumb "natural monopoly" arguments (while at the same time saying that competitors can always enter out of the other side of your mouth) from telco lobbyists, arguments that don't pass muster for anyone who actually peers into the issues.

 
At 9/03/2011 5:02 PM, Blogger truth or consequences said...

call me confused...

this site continiously rants against state run capitalist entities (China, Russia) and looks down it's nose at "socialist" Europe (U.K., France).....but when it comes to cell phone service and AT&T.....THAT'S the model to follow????...LOL

To me this just illustrates what I've come to understand about this site....lots of good info and stats....but the spin is always the same... NO MATTER what the data shows:

Regulation bad, gov. bad, taxes bad.....CEOs are saints and shareholders are angels. Don't worry be happy...just follow the WSJ!!!!... LOL

hate to break to you fellas but the world is not black and white....it GREY....you need balance...tata;)

 
At 9/03/2011 8:15 PM, Blogger Jim said...

The wireless and therefore cellular industry is about to undergo another revolution, as technology branches out.

Towers would then project 10-100x as far and handle multiple times current bandwidth capacities.

This technology already works.

Regulating fast changing industries like technology uncovers one of its weaknesses; it is always struggling to catch up and if anything, prevents the future from happening.

 
At 9/04/2011 1:43 AM, Blogger Ron H. said...

"The government is pushing choice, which is different than those at the top of the telecom concentration rankings. Does not more choice allow consumers to choose better consumptive goods and services?"

I think the problem here is "government pushing". If more choices are desirable, would the breakup of AT&T and Verizon into several smaller companies lead to better higher quality service and better prices, or just more choices?

Perhaps the market should be allowed to work without (more) government interference.

 
At 9/04/2011 1:46 AM, Blogger Ron H. said...

"this site continiously rants against state run capitalist entities (China, Russia) and looks down it's nose at "socialist" Europe (U.K., France).....but when it comes to cell phone service and AT&T.....THAT'S the model to follow????...LOL"

The rant here is generally against government interference in markets. Period. Nothing is inconsistent in this case.

 
At 9/04/2011 3:29 AM, Blogger juandos said...

"To me this just illustrates what I've come to understand about this site....lots of good info and stats....but the spin is always the same... NO MATTER what the data shows"...

Is it possible truth or consequences that maybe, just maybe you don't have a handle on the data?

Just asking...

 
At 9/04/2011 11:37 AM, Blogger IT STANDS TO REASON said...

Would we be better off or worse off today if Standard Oil still dominated the oil and gas industry? I suspect worse off with far less innovation. Just saying.

 
At 9/04/2011 1:35 PM, Blogger Benjamin said...

Ho about this model: State's Rights.

Each state can regulate its cell phone business as it sees fit. Not effing federal intrusion.

Just like the law industry.

 
At 9/04/2011 2:08 PM, Blogger truth or consequences said...

yet another contradiciton!!!!

state's rights????? ok so trade one goverment (big, if you want to call it that)....for FIFTY !!(????)

hey, now there's a model of effiency, or what??? Like that'll take fewer people to adminstrate. Duplicity and petty turf wars here we come....LOL

Better to just split the country into four pieces and try again.

 
At 9/04/2011 3:17 PM, Blogger Ron H. said...

"Would we be better off or worse off today if Standard Oil still dominated the oil and gas industry? I suspect worse off with far less innovation. Just saying."

While that's the conventional wisdom, it appears to be wrong. During the years of it's existance, although the company competed ruthlessly, the price of its main product - kerosene - dropped by 80%. Not what you'd expect from a company if it can control prices, which, after all, is the point of being a monopoly.

You might be interested in these bits from Wikipedia regarding the Standard Oil "monopoly":

"Some economic historians have observed that Standard Oil was in the process of losing its monopoly at the time of its breakup in 1911. Although Standard had 90% of American refining capacity in 1880, by 1911 that had shrunk to between 60 and 65%, due to the expansion in capacity by competitors."

"...by 1911 when Standard was ordered broken up and at least 147 refining companies were competing with Standard including Gulf, Texaco, and Shell. It did not try to monopolize the exploration and pumping of oil (its share in 1911 was 11%)."

"Standard's actions and secret transport deals helped its kerosene price to drop from 58 to 26 cents from 1865 to 1870. Competitors disliked the company's business practices, but consumers liked the lower prices."

You might find this piece enlightening,
and this :The Real History of Standard Oil

 
At 9/04/2011 3:27 PM, Blogger Ron H. said...

"hey, now there's a model of effiency, or what??? Like that'll take fewer people to adminstrate. Duplicity and petty turf wars here we come....LOL"

If it's efficiency you're after, maybe a single global World Government could regulate the wireless industry, or any other, for that matter, more efficiently. What do you think? Is there any limit to economies of scale, beyond which benefits don't accrue?

 
At 9/04/2011 7:42 PM, Blogger sethstorm said...

Given how badly ATT is with nickel & diming people, versus T-Mobile being more open and less draconian, I want the government to find every way to block the merger.

You and Don seem to think that worse-off service is better off for consumers. As a T-Mobile customer that has seen far better service than the customer hostile and cap happy ATT, your decision defies logic.

 
At 9/04/2011 7:49 PM, Blogger Larry G said...

It's all about the network and all about the towers.


the more towers you have - the bigger, stronger, more robust and reliable your network is.

Verizon is top DAWD on this.

How do the get to be top DAWG?

ATT is playing catch up and basically sees an opportunity to leap frog their way to a more competitive network...

the question is - if ATT gets a better network will they put pressure on Verizon to lower their prices ?

 
At 9/04/2011 10:44 PM, Blogger Don Culo said...

"To me this just illustrates what I've come to understand about this site....lots of good info and stats....but the spin is always the same... NO MATTER what the data shows"...

*************

And how long did it take you to notice?

 
At 9/05/2011 2:37 AM, Blogger Ron H. said...

"You and Don seem to think that worse-off service is better off for consumers. As a T-Mobile customer that has seen far better service than the customer hostile and cap happy ATT, your decision defies logic."

What defies logic, is your call for government interference in a market to prevent ATT from trying to improving their service. Why would you assume a merger would result in worse service for T-mobile customers, rather than better service for ATT customers?

Is Verizon available in your area?

 
At 9/05/2011 4:27 AM, Blogger sethstorm said...


What defies logic, is your call for government interference in a market to prevent ATT from trying to improving their service. Why would you assume a merger would result in worse service for T-mobile customers, rather than better service for ATT customers?

AT&T's prior history with integrating Cingular with AT&T Wireless. In addition:

* AT&T has no flat-rate data plan, or the appearance of one.
* Subsidized-cost phones are locked to AT&T, with no recourse to unlock them unlike T-Mobile.
* Current plans would remove T-Mobile's 3G towers if the merger went through.



Is Verizon available in your area?

Not to my equipment. It's incompatible with Verizon.
Even if I wanted to switch to Sprint, I'd have the same issues.

Another issue with providers like Sprint and Verizon is that you are stuck with what they provide. You can't bring in a phone outside their respective ecosystems.

Tower availability doesnt mean anything when it costs more to use it.

 
At 9/05/2011 12:22 PM, Blogger Ron H. said...

"* AT&T has no flat-rate data plan, or the appearance of one.
* Subsidized-cost phones are locked to AT&T, with no recourse
to unlock them unlike T-Mobile.
* Current plans would remove T-Mobile's 3G towers if the merger went through.



Is Verizon available in your area?

Not to my equipment. It's incompatible with Verizon.
"

It sounds like you're screwed.

When your current commitment is up, plan to bite the bullet & switch to Verizon. You will want to get 4G equipment soon anyway.

ATT is well known nationwide as a poor service provider. I don't know why they still have any customers. It must be the lure of shiny new equipment at low prices that keeps them coming back.

Just don't ask government to use force on your behalf, you may not like all the results.

 
At 9/05/2011 8:21 PM, Blogger sethstorm said...


When your current commitment is up, plan to bite the bullet & switch to Verizon. You will want to get 4G equipment soon anyway.


No flat-rate data, which Sprint does have. Verizon also actively antagonizes people with their phones being locked down worse than AT&T. Their history has been that way, even before the era of the smartphones - where a VZW phone would have things locked down that nobody else would have locked down.

Turning T-Mobile 3G phone into a 2G phone by axing towers seems like a move to devalue grandfathered agreements. As a personal example, one could have completely unrestricted data for $5.99/month if one signed up and kept the MMS data plan.

 

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