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

In “iSurrender: Apple’s new iPhone augurs the inevitable return of the Bell telephone monopoly,” Tim Wu argues that the previously broken up Bell telephone monopoly may be reforming with the help of Apple’s revolutionary phone.  

Wu begins by citing a personal experience: his impending purchase of the, at that time, new iPhone 3G. In order to connect the phone to the network, he must sign a two-year contract with AT&T. No other provider offers or has the ability to offer the plan for the new phone. He uses this example to make the point that the wireless industry, once thought of as the “poster child for competition,” is becoming more and more monopolistic, just like the days when Bell Telephone had a monopoly on the phone industry. Since the contract between Apple and AT&T ended a couple years ago, Verizon has become another big player in the iPhone sector. Wu argues that these two companies’ takeover of providing wireless for iPhones puts all the power back in the two halves of the old Bell company. Many of the small providers are being bought up, and others like T-Mobile just aren’t big enough to play with the bigger providers. Wu cites the high costs of being a player in this market as the main reason for its monopolistic characteristics. There is the possibility of change if Google and Android can make a run at Apple’s chokehold on the industry (Android’s coverage is provided by the Open Handset Alliance- Intel, Sprint, and T-Mobile). Wu finishes with an ironic fact that Apple, which used to be the victim of larger firms like IBM and Microsoft, is now a symbol of industry consolidation.

This is relevant to our discussion of monopolies since AT&T’s contract with Apple gives them the right to provide the network for the fastest growing phone on the market. Consequently, AT&T has a monopoly on wireless plans for iPhones. With no competition for the duration of the contract with Apple, they could charge a higher price than if the market was competitive.

Commentary

The justification behind the argument that monopolies are unethical is that it gives one firm the power to set a higher price than is necessary, or a higher price than would be set in a competitive market. This can be especially problematic in markets that contain necessities, or goods that everyone needs. Setting a higher than equilibrium price will cause people to devote more of their income to that item, and therefore make them worse off than they would be if the price was at market equilibrium. They are allowed to exist when economies of scale can be achieved at high levels of production only. For example, in the wireless industry a large amount of infrastructure is necessary to operate, making it hard for companies to enter the market.

Real-World Example

The utilities industry is a real world application of a monopoly market. There are very few providers that are all very big and often span large areas across the country.  This industry is similar to the wireless industry in that it also requires a large investment in infrastructure. Because of its monopolistic tendencies, this industry is highly regulated by the government.

Posted by Ian, Monica and Gunnar (Section 4)

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