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 LegoPower77AbecedarianPremium
join:2002-08-03
Midlothian, VA | Regulation= BAD In this discussion I am stuck by many people's view that government regulation is the only way to protect the consumer against the eeeevil corporations. Two things come to mind. Who pays corporations? That's right, we do, so they better make us happy. Second, how is a politician any less susceptible to greed and self interest? Corporations don't have threat of violence; government does —I'd rather trust the former.
The history of regulation shows that firms lobbied for it when competition reduced their profits. In 1897 the National Electric Light Assn. began lobbying for regulation and for "fair profit" price controls by the various states. The same scenario for the telephone industry (Ma Bell was a product of regulation, you big-governmenters). Actually, the first states to adopt regulation were the ones that had low profits and high output. The effect was to increase price and reduce output.
People make the case for regulation based on the natural monopoly argument. They say that (as in the case of electricity, natural gas, broadband), because of the expense of building such large transmission networks, the natural state of things is to have a few large firms. In order to protect the consumer, the state needs to regulate, usually by granting exclusive license and with price controls that guarantee "rate of return" (ROR for short) profits. The question comes to mind, if these were "natural" monopolies, then why the need to restrict entry?
In a free market —one with no barriers to entry, the "monopoly" firm always would have to guard against upstart competitors seeking a part of their monopoly profit (which is why you'd never see $200/month broadband). In economics, we call this the contestable markets theory, for which there is much empirical support.
The problem with price controls in this case is that they create the wrong incentives for the firm. ROR pricing is based on historical prices, not the current technology. If an industry is unregulated, when there is rapid technological advances, the old facilities become obsolete before their historical cost is fully depreciated. Firms abandon obsolete facilities sooner than if there had been no advancement. But under an ROR regime, the older facilities are protected by the averaging of their cost with the cheaper newer facilities into the rate structure. This has two effects that are exactly the opposite of what advocates of regulation say they want. First, since the older facilities are not abandoned and their cost is averaged with the newer ones, the price does not go down as quickly as it would if the old facility was abandoned altogether (assuming the new technology makes the product cheaper). Second, because of the guaranteed ROR, firms are more willing to try risky new technologies because they are less sensitive to cost overruns and since the consumer is made to pay for it anyway.
Firms operating under regulaton are less motivated to control costs than they would be in a competitive market and they do not abandon their older, inefficient facilities as readily. Prices under ROR regulation are set by adding capital cost and a profit rate to other costs, thereby attempting to reverse the competitive process by which prices determine the amount of capital cost one can profitably afford to incur.
The point of all of this is that it's better to live with a temporary monopoly, subject to free entry, then to have Leviathan with threat of force limiting our choices and stifling innovation.
For further elucidation
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"Lunches don't get free just because you don't see the prices on the menu. And economists don't get popular by reminding people of that." --Thomas Sowell | |
| How DARE you talk in terms that make sense and are true?? Don't you KNOW that DSLR is jam packed with legal, regulatory, technical and economic experts?? And don't you know that they ALL say that ANYTHING that happens in a positive way for the big, bad, RBOCs, cable companies and recording industries means instant death to the world as we know it?
People here will argue till they are blue in the face with ideas like, "Well, if you deregulate, then we'll all pay $2,000 per day DSL that won't even work!!!"
Just watch- you'll get the flamers that don't understand a WORD of your post- and they'll try to knock you down with baffling bullsh!t.
Boogie | |
| Couldn't agree more!! | |
LegoPower77AbecedarianPremium
join:2002-08-03
Midlothian, VA | reply to LegoPower77
What? Nobody has anything to say? C'mon you pro-regulators, find what's wrong with what I said. Your silence speaks volumes. . . . | |
| said by LegoPower77:
What? Nobody has anything to say? C'mon you pro-regulators, find what's wrong with what I said. Your silence speaks volumes. . . .
The funny thing is, that I've come to the conclusion that most who post here that are "pro-tearing down every big company" are simply out to start flame wars by name calling, insults, and claims of grandeur (like saying, "I built/invented DSL internet" or "I've been working as an engineer for a CLEC for 4 years now") hence, they seem to think that some technical knowledge of how DSL works means that they know marketing, regulatory and legal aspects of it (as well as any other telecom related subject) too.
They won't answer your post, because it doesn't have any "flame war" material that they might be able to use- it's a territory they are too unfamiliar with to go near.
Boogie | |
| reply to LegoPower77
"The point of all of this is that it's better to live with a temporary monopoly, subject to free entry, then to have Leviathan with threat of force limiting our choices and stifling innovation."
Take a look at the VoIP forum. Watch how hard the Bells fight for regulation of this new and better technology in the coming days. If SBC and Bellsouth have entire control over states broadband are they not the leviathan you speak of? I am not for or against regulation, but the bells are damn good at business, they have had many decades to learn it. If they desire to have no competition they can make free entry very difficult, even with regulations. | | |
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LegoPower77AbecedarianPremium
join:2002-08-03
Midlothian, VA
| Generally regulations are the method that firms use to erect barriers to entry.
As far as the Leviathan, two things. Monopolies in the pure sense don't exist because there is always alternatives (not buying is one). When we have seen monopolies, the price of whatever they produce comes down. Standard oil in 1870 sold refined oil at $26.4/bbl and had 4% market share. By 1911, they had brought the price down to $4.7/bbl and had 69% market share. Same scenario for Alcoa. In 1887 a pound of aluminum sold for $5-8, by 1941 it was down to 15¢/lb.
[text was edited by author 2003-02-17 21:38:45] | |
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