Monopoly

Discussion on iSurrender: Apple’s new iPhone augurs the inevitable return of the Bell telephone monopoly” by Tim Wu (Slate Magazine, June 2008)

Summary

This article highlights the effects of a potential monopoly in the wireless industry. Today, more so than when the article was even written in 2008, AT&T and Verizon dominate the wireless industry. Both companies are the two offshoots of the Bell telephone empire. All other companies who try and compete in the market are either dying (Sprint Nextel), bought out (Altell) or significantly smaller (T-mobile). The old Bell empire, then, still holds a monopoly over the wireless industry since it is essentially a duopoly today. Sales of the iPhone, only serviced by Verizon and AT&T, have driven the market further into this monopolistic model. Apple continuously comes out with new models of the iPhone that are always in high demand and dominating the wireless phone market. What is key about the iPhone though, is that it requires a plan from only AT&T or Verizon. Thus as demand for the phone rises, the structure of monopoly is advanced.

The article points out that the main reasons for the wireless industry tending towards being a monopoly is because the costs of competing in the industry are so high. Auctioning for rights to transmit signals across the electromagnetic spectrum costs firms billions; so only firms that are strong enough can compete in the market. This leads to the success of either a single firm or only a couple of firms, like AT&T and Verizon. While the article recognizes that Google and the Open Handset Alliance could pose a challenge to the structure, but the chances, especially with the existence of the iPhone are slim.

 Relevance to Classroom Theory

This article is relevant to classroom theory because it gives a close to real world example of a monopoly market. Government regulation today has prevented most firms from forming monopolies, however, this article highlights how the wireless industry operates in a virtual monopoly where only the offshoots of the Bell empire dominate and survive. Further, the theory in class assumes that entry and exit from the market is difficult. This article shows that this is the case for the wireless industry because of the extreme costs of spectrum auctions forming strong barriers to entry. Finally, the theory assumes that the firm is unique or without close substitutes. Because AT&T and Verizon have acquired the most rights to transmit signals across the electromagnetic spectrum there are no substitutes that can offer nearly the same quality of wireless service.

 Discussion

 

Monopolies are considered unethical because of the detriment they cause to society as a whole. Although one could make the argument that monopolies are beneficial because they occur naturally in a capitalistic economy and they provide jobs, the negatives outweigh these positives. Monopolies are caused by barriers to entries in an industry. Barriers to entry can include a high cost of starting a business, as in the wireless phone industry, to an established customer base, as in the National Football League. These barriers to entry lead to a lack of innovation from potential competitors. Another detriment of monopolies is the high cost charged to the consumer because of little competition. This elevated cost causes a deadweight loss because the supplier is making a larger profit and thus is able to produce less. Monopolies are allowed to exist because the products that monopolies produce are usually the best in the industry. Monopolies also tend to have the support of a loyal customer base, which makes it hard for the government to disband them in a legal battle. Another possible reason why monopolies may exist is with government intervention. In industries such as the oil industry and the postal service, it is crucial that the products these producers provide arrive on time and at an appropriate price. Government intervention assures that these companies are run smoothly and in the best interest of the country.

 Real World Application

Another real world application of the monopoly market is the credit card industry. Until 2004, Visa and MasterCard operated in a virtual monopoly with the banks. Banks would generally only issue credit and debit cards through either Visa or MasterCard associations. Visa and MasterCard were able to standardize procedures with the records to reduce fraud and misuse of the cards and both worked to establish international systems so the cards could be used globally. However, in 2004, Visa and MasterCard have been slapped with an antitrust court ruling that was originally brought up by smaller competitors. From then on, banks have been issuing Discover cards and American Express cards through banks in addition to Visa and MasterCard. This market provides a good example of what could happen to virtual monopolies should government intervention come into play.

Posted by Derek, Maria and Robert (Section 3)

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: