[Hidden-tech] Verizon vs. Comcast

[Victor Danilchenko]

Robert Heller wrote:

> It is not really a 'natural' monopoly.  It was created by federal law
> back in the early 1900's.  Back then there were *many* telephone
> companies, each with its own 'network' and without any interconnections.
>   

    Telephone providers are a natural monopoly in the standard economic 
sense, due to the so-called network effect (and relatively unusual in 
this regard, because most natural monopolies exist due to increasing 
return to scale rather than network effect).

    'Network effect' is the situation when a phone from which you can 
reach a thousand other phones is worth much less than a phone from which 
you can reach a million other phones, for example; i.e. when the 
marginal worth of each unit increase (under increasing return to scale, 
marginal cost decreases instead). Since no phone carrier is naturally 
required to share its network access with its competitors, eventually 
only one carrier would emerge with whom nobody could possibly compete: 
even if the new competitor charged less money, would you rather pay $20 
for a tiny network which has almost none of the people you want to call, 
or $25 for a network which reaches everyone?

    AT&T was well on the way to being such a natural monopoly by the 
time its monopolist status was legislated.

    The reason you see competition now is because of the Telecomm Act of 
1996, which effectively banned the network effect by legally requiring 
major backbone owners to sell access to their networks to other phone 
companies. While this is IMO a much better solution that simply 
legislating the monopolist's status, that in no way negates the fact 
that a phone carrier is, in fact, a natural monopoly.

    In this case, a good piece of quality regulation effectively created 
the efficient free market where none was previously possible.