Monopoly Blog Entry

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 his article “iSurrender,” Tim Wu argues that the wireless telephone industry has returned back to a monopoly. With the iPhone being continuously upgraded and improved, Apple is dominating the wireless industry leaving competitors far behind.

Wu notes the blame companies have placed on the iPhone for their severe losses and fall to acquisitions. Well known telephone companies have recently plummeted, with Sprint Nextel losing $29.5 billion in only one quarter last year and Alltel being bought by Verizon. The recent failure of these formerly successful companies is due to the lack of competition present in the wireless telephone industry. The article points out that the wireless market is no longer the “poster for competition,” but now includes only few producers with Apple as its single powerhouse.

One reason the iPhone appears to be a monopoly is barriers to entry, with costs of entering the market being sky high. Wu notes the soaring prices of fair spectrum and specifically how it serves as a barrier to entry in the wireless telephone market. In perfectly competitive markets, firms enter the market with ease when they view economic profits, forcing prices to go down until firms choose to exit. In such markets, profit in the long run is inevitably zero. Without free entry and exit, as in the wireless telephone industry, firms can earn profits in the long run and thus have no incentive to exit the market. The lack of competition in a monopoly allows a firm to be price maker instead of a price taker, thus earning high profits and dominating the market as Apple does.

In Wu’s opinion, the growing popularity of the iPhone is not Apple’s fault. Rather, it is due to the economic nature of monopolies that so many wireless companies have begun to fail. The absolute dominance of the iPhone has surely changed the wireless telephone industry as we have recently known it. Wu notes, however, that the iPhone has actually brought back the telephone monopoly that has lasted for most of our history.

 Commentary

Monopolies have an immense amount of power in the marketplace due to the lack of substitutes and little to no amount of competition. A monopolistic company can sometimes be formed because the barriers of entry to the industry are so high, such as in the oil industry. They can also be created by gradually beating out the smaller competitors and local businesses on price until they can no longer compete which is argued to be unethical. By being the only producer of a good, this also means that the demand curve of the company and the demand curve of the market are equal. In essence, a single business encompasses the entire industry. This allows a monopolistic firm to set their own prices and maintain complete control over the production decisions. Monopolies are able to sell fewer products at higher prices without being effected by any competition in the market place that would normally drive their prices down.  To some, this is viewed as unethical because it allows the company to become inefficient over time and charge unreasonably high prices for a product and high profit margins.

Even though they are sometimes viewed as unethical, some monopolies are allowed to exist. In fact, the government often creates specific monopolies (called government-granted monopolies) through patents and copyrights. These granted monopolies are argued to ensure a degree of organization over a certain industry, without having the industry actually be run by government. The government would also want to create a monopoly over certain goods such as electricity, the postal system or public utilities in order for them to remain carefully controlled.

 Real World Application

Monopolies have a history of forming in the technology and telecommunications sectors of the market.  The former titan of the technology space, Microsoft, was accused of monopolistic practices and taken to court in the famous United States v. Microsoft case.  The Department of Justice claimed that by bundling Internet Explorer with Microsoft Windows the market for alternate web browsers was severely restricted, as they were less convenient to acquire.  Moreover, there were questions over whether Microsoft’s programming interfaces were designed to work better with Internet Explorer, which would further cement the argument.  These claims point to one of the main causes of monopoly power, barriers to entry.  The harder it is for other firms to enter into the space Microsoft occupies, the easier it is for Microsoft to maintain as high a market share as possible.

Posted by Benjamin, Jennifer and Kayla (Section 1)

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