Price Fixing? Not on your nellie!

Remember how I said free market cartels and labor-market monopsony do not exist?

The subreddit called BadEconomics includes a delightful thread on the subject of cartels so I feel I should append it to this blog. Here you go. It goes something like this;

Any market with four or fewer competitors is just naturally going to suffer from price fixing. (self.badeconomics) by DrSandbags

https://np.reddit.com/r/technology/comments/6382rq/fcc_removes_competition_requirement_from/dfs8a0b/?context=1

From /r/technology comes another thread filled to the brim with an incredibly nuanced and sensible discussion of communications policy.

The idea of something called competition in providing Internet service is ridiculous. Even if all four of the major competitors were in the same area, they would simply make a gentleman's agreement on prices.

There are two aspects that make price fixing (or collusion in general) much more difficult to maintain that are present in this situation:

1.) It is more difficult to resist cheating in a collusive agreement as the number of competitors go up. With each additional colluding firm, the collusive joint profits get divided even further. This makes the alternative of cheating - by dropping price to capture all or a large portion of total profits - more attractive to any single colluding firm thus making collusion less sustainable.

2.) A collusive agreement can be enforced if all participants can easily monitor each other, but if pricing is difficult to monitor, then it is very easy to cheat. ISPs, especially national multimarket ones, typically operate on a pricing model that involves new customer deals, haggling, and some price discrimination. This means that, for example, two people from the same customer profile can pay different prices for Internet service depending on if one is a new customer or if one is willing to call up their ISP to haggle on price and service. It should also be mentioned that bundling of services (e.g. Phone + TV + Internet for $109.99/month) makes it difficult to impute the price paid for Internet service alone. While AT&T might be able to look at Comcast's website and see the distribution of pricing for advertised offers, it is pretty much impossible for them to see the distribution of pricing among what all of Comcast's customers actually pay.

I'm sure they're all friends with one another, know each other's wives, drink blood together, praise Satan together, and so one.

It's not entirely clear whether this commenter believes that pricing policy for large multimarket ISPs is set by local managers rather than a centralized pricing department. Such a scheme among ISPs (localized pricing management) would likely be very inefficient compared to taking advantage of scale economies. The HQs of ISP giants like Comcast, Mediacom, Charter, AT&T, Centurylink, etc are all spread out across the nation, so people responsible for pricing policy in their respective companies likely never interact with people of other companies on a regular basis. It's not like they're a bunch of local propane dealers sorting out a price fixing scheme at their neighborhood diner.

It could also be the case that a market is served by 3 or 4 local companies run by managers who's wives all drink blood together every Saturday at the local farmer's market or something, but this type of market (all competitors local) is very rare among ISPs if it exists at all.

To extend a small olive branch of fairness, it is legitimate to question whether a market can be made more competitive by adding a 3rd or 4th competitor. This is an open question and is actually an area of research in my PhD. But if I can point to one piece of research (to satisfy the R1 guidelines! :p), Xiao and Orazem (2011) use a Bresnahan and Reiss framework to study how subsequent entrants into local ISP markets affect profits. They find that markets get significantly more competitive as 2nd and 3rd firms enter into the market, but by the 4th entrant, competitive conduct does not differ.

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The discussion that kicked in subsequently was very interesting because it gave a lot of context on the contemporary telecommunication services industries in the USA.

Also, interesting debate was fired up about the anti-competitive nature of the government system of awarding permission to put down lines in localities.

Give it a read, you swinehunds!