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more on regulation/deregulation of communications
From: Dave Farber <dave () farber net>
Date: Sat, 11 Jan 2003 07:03:14 -1000
------ Forwarded Message From: "Faulhaber, Gerald" <faulhabe () wharton upenn edu> Date: Sat, 11 Jan 2003 11:00:53 -0500 To: "David P. Reed" <dpreed () reed com> Cc: dave () farber net Subject: RE: [IP] regulation/deregulation of communications This is a way better description of the issue (as I would expect from David Reed). David's central point is Schumpeterian: static analysis will not suffice in a world dominated by technical change. It is certainly the case that natural monopoly is a static concept, and as such it properly evokes regulation as a welfare-improving government intervention...maybe. When the technology is relatively constant, it is arguable that a natural monopoly should be regulated. But when the technology begins to change, what then? Regulation has great difficulty accommodating innovation; bureaucratic/administrative systems break down in the face of innovation, or even worse, reach out to suppress it. Not evil people; just inappropriate institutions. In fact, I would say that our greatest challenge in telecoms today is how institutions need to change, and how difficult the political process makes that change. We see this in wireline regulation, where the FCC and the RBOCs are locked in a sweaty embrace of mutual suspicion, inefficiency, and lack of innovativeness that neither side seems to be able to break. In wireless, it is the old-fashioned GOSPLAN model of spectrum allocation we all hate (in different ways). But political/regulatory change is much more difficult than technical change. History tells us it is subversive technologies that force bureaucracies and politicians to accommodate the new realities (e.g., banking deregulation in the '80s, microwave transmission in telcos in the 1950s). But it can also act to suppress innovation (extending regulation from railroads to trucks in the 1930s, to negative effect). The Internet is just such a subversive technology; it holds great hope to undermine the old institutions, including regulation. But it is not guaranteed to happen. I am concerned that those who ask for government intervention to "protect" something (e.g., end-to-end) don't understand the endpoint of regulation. Economists use the phrase "the dead hand of regulation" based on long experience and massive research results; and we see it in the real world as well. If you want to see the endpoint of government intervention in the Internet (e.g., to ensure end-to-end), look at telco regulation today, because that's the fate of regulated industries, regardless of how "enlightened" regulators may be. Gerry -----Original Message----- From: David P. Reed [mailto:dpreed () reed com] Sent: Saturday, January 11, 2003 8:55 AM To: dave () farber net; Faulhaber () mail3 atl registeredsite com; Faulhaber, Gerald Subject: RE: [IP] regulation/deregulation of communications At 09:17 AM 1/9/2003 -1000, David Farber wrote:
David (not djf) is confusing the concept of natural monopoly with its application to the telephone business. To say that "natural monopoly" is a discredited concept in economics is simply false. It is a clearly defined concept dating back to John Stuart Mill, and more recently refined by many others (among them, moi). Most generally, a natural monopoly is an industry in which the firm's cost function is subadditive. In the special case of a single product firm, the industry is characterized by declining average cost.
Gerry is, of course, correct. Natural monopoly is not a discredited concept in the abstract. What I should have said, which Gerry said more clearly, is that it's far from clear whether "communications" is a natural monopoly. The other thing I should have said, which Gerry did not say, is that the purpose of deciding (empirically) whether some industry is a natural monopoly is not to minimize "waste" by duplication as Feldmeier suggests, but to decide whether that industry will necessarily be dominated by a single player who will exercise monopoly power to set prices far from marginal costs, thereby minimizing public welfare. It's clear that competition very effectively eliminates wasteful redundancy. Finally, I didn't mention the deepest flaw in thinking about "natural monopolies" which is the implicit assumption that pervades much of economics - that the entire system is in equilibrium. In the areas of technology-based business in particular, one has to account for massive technology change, based on new scientific knowledge and architectural redesign. The Internet shows this clearly. A very simple idea (that bits are bits) was finally incorporated into a universal interoperable network that unified many unrelated and "independent" communications "markets". All of a sudden, the system was no longer in equilibrium. A copper wire need not be viewed as a "telephone" wire, but as a "bit" wire. A "coax" need not be viewed as a "community antenna TV distribution wire" but as a "bit" wire. It turns out (in 20-20 hindsight) that the "natural monopoly" in Telephony disappeared when Shannon invented the idea of the bit (or perhaps earlier). But what caused that change. The inherent flaw in Natural Monopoly is that it presumes that one can view a system in isolation and in equilibrium. Of course this is not possible. Does this mean that we don't need regulation? No, I think that is a false conclusion. But it does suggest (and I know that economists vary in their opinion on this) that it is not easy to determine empirically that some business is a Natural Monopoly. The fallacy is that one can measure "costs" and determine whether they are subadditive in the face of technology uncertainty and market uncertainty. If we had an Oracle (not Larry Ellison's) that could know in advance what we will learn in the next 50 years about how communications works, we could in principle determine whether a business is a natural monopoly. But that Oracle is clueless about both technology and market needs. Who could have predicted the Internet's cost structure, the potential of fiber optics, Moore's Law (which depended on a mass-market computer industry's growth potential), or the rise of consumer demand for the WWW and email, even 25 years ago? Testing for Natural Monopoly is a bogus idea, wrongly applied. That's what is discredited. A few economists (Carliss Baldwin is one) are trying very hard to get economics to recognize that its view of technology and architecture is way to reductionistic. Knowledge and Design are not at all minor elements of economic systems, mere coefficients or parameters. Knowledge and Design are the big deal - economics (in its narrow definition) has developed by ignoring these major factors. ------ End of Forwarded Message ------------------------------------- You are subscribed as interesting-people () lists elistx com To unsubscribe or update your address, click http://v2.listbox.com/member/?listname=ip Archives at: http://www.interesting-people.org/archives/interesting-people/
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- more on regulation/deregulation of communications Dave Farber (Jan 11)