I would expect Verizon to follow AT&T in this move within short time, just like how VZ eliminated the unlimited plan very soon after launching the iPhone.
It would make sense if Verizon and AT&T had these patterns of interaction (from their perspective). It sets a precedent for AT&T to make changes that are good for profits, and Verizon following suit, thus magnifying the effect. Since they are the two biggest providers of services in the US, it makes sense that they'd have an implicit agreement to collude.
Although it's hard for me to disagree with their offering tiered services (It makes sense from a social-surplus standpoint with respect to monopolies and monopoly pricing), as someone else already mentioned, this is symptomatic of the lack of competition (which also, to an extent makes sense because of the natural-monopoly nature of the industry).
1. The government steps in and offers a competing service, at marginal cost. But who says the government can do it better, or even at parity?
2. The government auctions off a contract (Say, in terms of $/year) to a provider, and subsidizes them (at the unit level) such that marginal revenue = marginal cost. The good thing is that the final price of the auction in a competitive market (no collusion, implicit or explicit) incorporates the benefits of the stream of subsidies and monopoly profits. As a result of this, we can achieve a socially optimal (i.e. pareto efficient) outcome. The problem is that it's hard to know MC for sure.
3. The government imposes price caps slightly above marginal cost. Again, what's the marginal cost?
4. Break them up into little chunks. However, this would eliminate a lot of the benefits of natural monopolies and economies of scale.
All of them have some problems of their own, not to mention headwinds against political action
Mmm, not really the same thing. In the wholesale case, the spectrum holder isn't incurring the costs of delivering service to individuals, such as customer support, individual billing, and advertising. That brings the wholesale price much lower than the marginal cost of providing retail service.
One interesting variation would be for the spectrum holders to sell only wholesale service. They would then be competing on technical attributes such as reliability, while the retailers would be competing on customer service and bundled applications. Some retailers could even offer devices that worked transparently with multiple wholesalers, allowing retailers to switch wholesalers, instead of being locked on like today's virtual carriers.
I wouldn't say it's a market failure, it's more of a regulatory failure. The problem isn't that a lot of competition has resulted in no benefits for the consumer; the problem is that a lot of competition hasn't existed yet. It's a lack of a market, not a market failure.
Right now the expense of complying with regulation alone is enough to make most potential competitors balk. Combine this with the fact that it takes years of legal hoop-jumping and other paperwork before you can even create a truly independent provider, and it becomes pretty hard to start a new cell network.
It certainly is a market failure, not a lack of a market, unless you define market differently than the convention I'm familiar with.
This specific form of market failure is a failure in market structure. Of course regulatory failures exacerbated this problem (or at least didn't fix it), but it's not the main "cause" of the failure, by which I mean "would it naturally without any regulation at all?"
Regarding your second paragraph, yes, that is a regulatory burden and it's true that it increases the barriers to entry into the industry, and I suppose that's an argument for why regulation caused market failure. But is it the main cause? I think it's because this particular market structure is inclined to a natural monopoly (or something close) because of the high-fixed-costs nature of the business.
Comments
I would expect Verizon to follow AT&T in this move within short time, just like how VZ eliminated the unlimited plan very soon after launching the iPhone.
It would make sense if Verizon and AT&T had these patterns of interaction (from their perspective). It sets a precedent for AT&T to make changes that are good for profits, and Verizon following suit, thus magnifying the effect. Since they are the two biggest providers of services in the US, it makes sense that they'd have an implicit agreement to collude.
Although it's hard for me to disagree with their offering tiered services (It makes sense from a social-surplus standpoint with respect to monopolies and monopoly pricing), as someone else already mentioned, this is symptomatic of the lack of competition (which also, to an extent makes sense because of the natural-monopoly nature of the industry).
In short, this is a result of a market failure (http://en.wikipedia.org/wiki/Market_failure) where there are a few possible solutions:
1. The government steps in and offers a competing service, at marginal cost. But who says the government can do it better, or even at parity?
2. The government auctions off a contract (Say, in terms of $/year) to a provider, and subsidizes them (at the unit level) such that marginal revenue = marginal cost. The good thing is that the final price of the auction in a competitive market (no collusion, implicit or explicit) incorporates the benefits of the stream of subsidies and monopoly profits. As a result of this, we can achieve a socially optimal (i.e. pareto efficient) outcome. The problem is that it's hard to know MC for sure.
3. The government imposes price caps slightly above marginal cost. Again, what's the marginal cost?
4. Break them up into little chunks. However, this would eliminate a lot of the benefits of natural monopolies and economies of scale.
All of them have some problems of their own, not to mention headwinds against political action
5. The government requires every mobile carrier to sell access wholesale, at cost. (And, yeah, again, what cost?) Like line sharing.
This is a subset of "require price close to marginal cost" option.
Mmm, not really the same thing. In the wholesale case, the spectrum holder isn't incurring the costs of delivering service to individuals, such as customer support, individual billing, and advertising. That brings the wholesale price much lower than the marginal cost of providing retail service.
One interesting variation would be for the spectrum holders to sell only wholesale service. They would then be competing on technical attributes such as reliability, while the retailers would be competing on customer service and bundled applications. Some retailers could even offer devices that worked transparently with multiple wholesalers, allowing retailers to switch wholesalers, instead of being locked on like today's virtual carriers.
I wouldn't say it's a market failure, it's more of a regulatory failure. The problem isn't that a lot of competition has resulted in no benefits for the consumer; the problem is that a lot of competition hasn't existed yet. It's a lack of a market, not a market failure.
Right now the expense of complying with regulation alone is enough to make most potential competitors balk. Combine this with the fact that it takes years of legal hoop-jumping and other paperwork before you can even create a truly independent provider, and it becomes pretty hard to start a new cell network.
It certainly is a market failure, not a lack of a market, unless you define market differently than the convention I'm familiar with.
This specific form of market failure is a failure in market structure. Of course regulatory failures exacerbated this problem (or at least didn't fix it), but it's not the main "cause" of the failure, by which I mean "would it naturally without any regulation at all?"
Regarding your second paragraph, yes, that is a regulatory burden and it's true that it increases the barriers to entry into the industry, and I suppose that's an argument for why regulation caused market failure. But is it the main cause? I think it's because this particular market structure is inclined to a natural monopoly (or something close) because of the high-fixed-costs nature of the business.