Monopoly

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

In this article, Tim Wu discusses the potential for a monopoly to form in the wireless phone industry, using Apple’s iPhone 3G to show how AT&T and Verizon are gaining power over competitors. The author discusses how the launch of the then latest iPhone 3G, with its groundbreaking features, will force him to leave T-Mobile and sign a two year contract with AT&T (at the time, AT&T was the only provider that Apple had partnered with). He goes on to argue that the huge demand that Steve Jobs and Apple created for the new iPhone is just another force that is propelling the industry into a state of monopoly where AT&T and Verizon are by far the strongest competitors, while Sprint recorded a huge loss in a single quarter of 2007, and T-Mobile didn’t have the market share to compete strongly with AT&T and Verizon at the time. This is significant because AT&T and Verizon were both part of the Bell Telephone monopoly that was broken after an anti-trust lawsuit in the 1980’s. The fact that these two firms seem to be monopolizing the industry leads Wu to argue that some industries, particularly the utility industries with high costs and high barriers to entry, leading to opportunities for economic profit in the long run, are prone to monopolies forming over time.

Many people argue that monopolies are unethical, justified by the fact that, when they control an industry, they become price makers rather than price takers (as in perfect competition), and can charge as high of prices as they want giving the consumer little to no power at all. This can be seen in the iPhone example, where AT&T can charge high prices for iPhone contracts because they are the only provider that has partnered with Apple. In other words, Apple’s choice in partnership has made it so that, if a consumer wants an iPhone they must pay whatever price AT&T wants to charge for service, since the iPhone is a unique good with almost no close substitutes, one of the main characteristics of a monopoly. It’s important to note that there will be an upper limit to what AT&T can charge since demand for the iPhone is not perfectly inelastic, and still has a downward sloping demand curve, but AT&T and Apple can still both make billions from this partnership by excluding the other wireless providers from this deal.

As Wu touched on in the article, some industries are more prone to the formation of monopolies than others, the cell phone industry being just one example. Therefore, one reason that the government may allow, or even create monopolies, is so that it can have more control over the industry and the supply of that particular good or service. Although this may seem unethical, many argue that it is necessary in certain industries that aren’t naturally capable of perfect, or even any, competition.

The cartoon that will be displayed in class (memory peg) is among the most famous political cartoons in U.S. history.  This depicts the infamous Standard Oil monopoly as a giant octopus, with each tentacle representing the company’s influence in various different spheres.  They include the Capitol, the White House, lobbyists, etc.  It was truly one of the most powerful forces in America at the time.  By 1890, Standard Oil controlled 88% of refined oil in the United States. This allowed them to control the price of oil. Also, since oil refining has such high barriers to entry, they had no serious competitors, making them basically the only company in the industry.  In 1911, the Supreme Court declared the company anti-competitive and broke it up into 34 independent companies under the Sherman Antitrust Act of 1890.

Posted by Brenna and David (Section 2)

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: