Tuesday, June 25, 2013

Free Market Ideology And The Broadband Market In The US

This article explains why internet service is so expensive and the service is so poor in the US.  The explanation is simple.  The service provider industry is monopolistic, and it is weakly regulated.  Unlike other utilities in the US, which are granted monopoly power by government for good reasons,  Comcast, Verizon etc. are very weakly regulated.  They have managed to escape regulation by spending vast sums on lobbying.  Some of their strongest defenders are "libertarian" organizations which pretend to love market competition.  Their definition of economic freedom is the freedom to operate in their own best interest.

The internet provider industry provides a good example of how many industries in the US evolve into oligopolies.  Of course, Verizon competes with Comcast for new subscribers, but they share a common interest.  They want industry profits to grow and they avoid price competition which would lower the industry profits which they share.  One of their best sources of new revenues and profits is to expand the services that they provide to existing customers.  They can implement new technologies to increase the speed of the service that they provide but this comes at a high cost relative to the cost of speeding up their networks.  They can also sell TV and voice services to their existing customers.  Both of them provide similarly prices packages which include all three of these services.  They both use the same marketing concept to sell their packages.  They offer combinations of services to existing customers at a very low introductory rate.  The rates go up dramatically at the end of the introductory period, and the customer has to take the initiative to alter the package that was purchased.  Software companies operate in a similar fashion.  For example, Microsoft fixes some of the bugs in its operating system and it adds a few new features and it sells the software to customers who have licensed the previous releases of the software.

Around 80% of sales in the US occur in industries that are heavily concentrated, and in which price competition is not the primary mode of competition.  That is what we mean by free markets in the US.  They are markets with very little price competition.  That is very good for corporate executives and shareholders that benefit from monopoly profits.  It is not very good for many customers and workers who now compete in global labor labor market that is price sensitive.

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