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CHAPTER 26 -- Part 3: MONOPOLISTIC
The telephone industry is an example of a natural monopoly.
The marginal cost of an additional telephone call is zero, even though enormous fixed costs are necessary to establish a telephone network.
It made sense to have a single network of telephone lines and switches.
Congress allowed AT&T to maintain a monopoly on both long-distance and most local telephone service.
The FCC regulated phone services and prices to assure consumers that they would benefit from the natural monopoly.
Technology outpaced regulation once again.
Satellites made it easier for new firms to provide long-distance telephone service.
The rate structure that AT&T and the Federal Communications Commission established made long-distance service highly profitable.
Consumers petitioned for lower rates as start-up firms clamored to get into the industry.
The courts put an end to AT&T's monopoly in 1982, transforming longdistance telecommunications into a more competitive industry with more firms and less regulation.
Over 800 firms have entered the industry since then, and long-distance telephone rates have dropped sharply.
Long-distance telephone rates fell between 1983 and 1990.
New phone-line services such as fax transmissions, remote access, and Internet access improved the quality of service.
The United States has seen a tripling of long-distance telephone use.
The same things have happened around the world as other telephone monopolies have crumbled.
Observers wondered if local telephone service might be deregulated as well after the success of the deregulation of long-distance services.
The basis for natural monopoly was undermined by the privatization of the state-owned monopoly.
The same technology was used in 1996.
Competitive entry began in 1998.
Entry barriers were dropped when the Entel monopoly was late in 1994.
Rates went down and volume went up.
The 10 regional phone companies had their share fall from 100 to 40 percent.
The works were opened by the state-owned monopoly.
In 1998 there were over 200 new companies in the industry.
The Japanese government ended competition in 1984.
A new domestic and international monopoly has been built by the Japanese company.
The number of companies entering has dropped dramatically.
The British government opened long-distance markets to competition.
China split its fixed-line monop build into two competing networks at the end of 2001.
The French government allowed competition in equipment and services despite keeping a single network.
The deregulation of the telephone industries has led to price competition and innovation.
New technologies allowed wireless companies to offer local service if they could gain access to the monop.
Congress responded in 1996.
Rivals should be given access to the Baby Bells' transmission networks.
The fight for local access continues.
The primary concern of the CAB was to ensure a viable system of air transportation for both large and small communities.
The CAB believed that a fair level of profits was needed to ensure a system.
The levels of Pullman rates for train travel were set by the CAB.
Airfares would be proportional to distance, as they were for train travel.
The fare structure in the late 1930s was not unreasonable as most flights were short and planes were small.
The basic distance-based fare structure was maintained as the airline industry grew.
The CAB set fares to ensure fair profits.
The accounting data provided by the airlines required the CAB to undertake intensive cost studies.
The local phone competition is taking hold.
10% of the rules enacted in the wake of the 1996 Telecommunications Act weregutted by The Bells.
They require the Bells to rent their networks at reasonable prices to potential rivals that may want to offer local phone service but can't afford to set up their own phone networks.
For a long time, the law was not an issue because states allowed the Bells to charge high fees that kept competitors out of their mar 2% kets.
Communications charges for tapping into a network.
The FCC forced the Bells to rent their networks at a loss.
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If you want to enter the local phone markets, you have to pay an access fee.
Entry barriers are high with high fees.
To ensure air service to smaller, less traveled communities was a secondary objective of the CAB.
Higher fares are justified because of the higher average costs of short hauls.
To maintain the price and profit structure, the CAB had to regulate routes.
New carriers would only offer service on more profitable routes if established carriers abandoned unprofitable routes.
Cross-subsidization and the CAB's vision of a fair profit were threatened by unregulated entry.
Entry into the industry was restricted by the CAB.
Wouldbe entrants had to show the CAB that their service was superior to established carriers and that it was needed by the public.
To oppose a new application, established carriers need to demonstrate sufficient service, offer to expand their service or claim superior service.
New applicants had no airline experience, so established carriers easily won the argument.
The price competition between established carriers was eliminated by the CAB.
The airfares were fixed by the CAB.
The airlines couldn't increase their fares more than 10 percent without the approval of the CAB.
The established airlines failed to make much money from these high fares.
The established carriers were unable to compete on the basis of price.
Frequency of service was the most expensive form of nonprice competition.
Once the CAB authorized service between any two cities, a regulated carrier could provide as many flights as they wanted.
The regulated carriers were able to purchase large fleets of planes.
Load factors fell and average costs rose as a result of the process.
Competition tures that make one product more expensive and less profitable.
Consumers weren't being offered many price-service combinations.
The structure and behavior of the airline industry was changed by the Airline Deregulation Act of 1978.
Entry regulation was abandoned.
The new entrants made it difficult to petition on nearly all routes.
In May 1978 the share of domestic markets with four or more carriers was 13 percent, and in May 1981 it was 73 percent.
All the new entrants were granted patents.
The authority over airfares ended on January 1, 1983.
Since then, airlines have been able to adjust their fares.
The CAB was eliminated at the end of 1984.
The responsibilities for foreign travel, mail service, mergers, and operating authority were transferred to the U.S. Department of Transportation.
Concentration is increasing.
The airline industry structure and behavior remain imperfect despite being hailed as one of the greatest policy achievements of the 1980s.
The industry's concentration ratio has increased in the last 10 years.
Many new entrants and some established airlines went broke because of deregulation.
Scores of airline companies exited the industry in 1985-95 because they couldn't match lower fares and increased service.
Major carriers increased their market share.
By 2005, 1 out of 10 domestic routes had been monopolized by firms.
According to the U.S. General Accounting Office, ticket prices are 45 to 85 percent higher on routes where at least two airlines compete.
Major carriers need to keep out their rivals.
Smaller airlines are upset with Los Angeles.
Even when the slots aren't being used, they can't get access to that information.
Would-be foreign competitors complain that they can't get access to U.S. routes.
The Air Commerce Act forbids "foreign control" of airlines flying domestic U.S. routes.
Virgin Air was denied entry into the U.S. airline market by the U.S. Department of Transportation.
The pressure on existing airlines to improve service and reduce fares would have increased had Virgin been allowed to enter the industry.
In 1979 a single carrier supplied at least 90 percent of all traffic in monopoly markets.
Only 11 percent of traffic was in monopoly markets by 1989.
If prices consumers continue to enjoy the low fares deregulation has made possible, ject to potential entry if entry is lowered.
It doesn't have permission from the U.S.
The department of transportation is going to take off.
The DOT "tentatively" rejected its application because of its business empire.
The British business establishment is set up as an American-style entrepreneurial industry, with a number of full flights rising.
It doesn't need another low-cost rival.
A 1926 federal law bars foreigners from controlling domestic carriers, and a furious onslaught from the airline's wouldbe competitors, has run into Peter Elkind's dream of launching Virgin America.
Virgin America is based in San Francisco.
Regulations that prevent entry into an industry cause prices and service levels to go up.
In August of 2007, Virgin America received permission to fly.
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New entrants will keep pressure on prices and service if entry barriers are low.
Local cable TV operators could be franchised by the city and county governments.
Local governments established local monopolies when they franchised only one operator.
The monopoly structure was justified by economies of scale and the desire to avoid the cost and disruption of laying multiple cable systems.
The reason for local regulation of cable prices was to ensure that consumers shared in the benefits of natural monopoly.
Congress believed that broadcast TV and emerging technologies offered enough competition to ensure fair prices and quality service.
The cable TV industry was unregulated from 1986 to 1992.
After price regulation ended, cable companies began increasing their rates.
After the cable industry was deregulated, the rate of price acceleration doubled.
Consumers complained that local cable companies didn't offer good service.
The Cable Television Consumer Protection and Competition Act was enacted in 1992.
The FCC has the authority to regulate cable TV rates.
450 pages of new rules were issued to limit future price increases.
The interventions shown in Figure 27.4 had a dramatic effect on cable prices.
Consumers applauded the new price rules, but cable operators warned of long-term effects.
Between 1993 and 1995 the rate cuts reduced cable-industry revenues by $4 billion.
The cable companies say they would have used the revenue to improve their networks and services.
After cable TV prices were late in 1986, monthly charges went up a lot.
The Telecommunications Act of 1996 deregulated prices and they went up.
Rate regulation was phased out by the Telecommunications Act of 1996.
As Figure 27.4 shows, cable prices went up again.
Critics said alternative technologies were not viable competitors to local cable monopolies.
Access to the video market has been restricted even where alternative technologies are available.
Deregulation of the electric utility industry is on the agenda.
The industry has been seen as a natural monopoly.
Electric utilities had a downward-sloping average total cost curve because of the huge fixed costs of a power plant and transmission network.
The focus of government intervention was on rate regulation.
Local rate regulation wasn't working well enough according to critics of local utility monopolies.
The utility companies allowed costs to rise in order to get higher retail prices.
They didn't have an incentive to pursue new technologies that would reduce the costs of power generation or distribution.
Steel companies complained that high electricity prices were making it hard to compete.
Consumers could only move from a state with a high-cost power monopoly to a state with low-cost power monopoly.
Consumers had a new choice when it came to transmission technology.
It is possible to carry power thousands of miles with negligible power loss.
These lines were used by utility companies to link their power grids.
They created a new entry point for potential competition.
The Kentucky power plant has enough capacity to supply electricity to California.
There is no need for a regional utility monopoly anymore.
Since 1992, utility companies have traded electricity across state lines.
Every house and business has wires that carry electricity.
Competition in local telephone service has been hampered by this problem.
Local power companies don't want to open the wires to competition.
Ensuring wider access to local distribution grids has been a problem for electricity deregulation.
The California legislature decided to strip local utility monopolies of their production capacity.
There was a conflict between ownership and access to the distribution system.
It made California's utility companies dependent on third-party power producers, many of which were out of state.
California's utilities were trapped between rising costs and a fixed price ceiling when wholesale prices rose in 2000.
The retail price ceiling was not raised because of a political backlash.
Some of the utility companies were forced into bankruptcy as a result.
The state entered the utility business by buying power plants.
Californians ended up with very expensive electricity.
Other states and countries have shown how Visit the Center for the advancement can be improved.
The price of Energy Markets at www.caem.org declined by 20 percent after Norway deregulated its electric industry in 1991.
After the European Union started deregulating its electric in 1999, prices fell.
In the United States, the 50 states are at various stages of electricity deregulation and amassing lots of evidence on how to use competition to reduce elec price changes.
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The state's utility companies lost money when the wholesale price of electricity went above the retail price ceiling.
It was a recipe for disaster.
More competition, lower prices, and improved services are some of the benefits of deregulation.
The case for laissez faire is strengthened by these experiences.
We should not jump to the conclusion that all regulation of business should be dismantled.
The regulation of certain industries has become outdated.
Changing consumer demands, new technologies, and substitute goods made existing regulations obsolete.
They were doomed to extinction by a combination of economic and political forces.
Railroads were the only viable alternatives to overland transportation in the early 20th century.
The forces of natural monopoly could have hurt the economy.
Prior to the launching of communications satellites, the same was true for long webnote distance telephone service.
The limitations on competition in trucking and banking made sense in the depths of the Great Depression.
One shouldn't conclude that regulatory intervention didn't make sense because regulations later became obsolete.
Natural monopolies include the transmission networks for local telephone service and electricity delivery.
The government can make owners allow more access.
An unregulated network owner could still make a lot of money.
At critical entry or supply junctures, even a deregulated industry may still need some regulation.
Existing regulations are likely to generate better outcomes than unregulated monopolies.
Few people propose relying on competition and good judgement of consumers to determine the variety or quality of drugs on the market.
Competition in the drug industry is restrained by regulations imposed by the Food and Drug Administration.
They make drugs safer.
There is a trade-off between the virtues of competition and regulation in this industry.
The basic policy issue is whether the benefits of regulation outweigh their costs.
The challenge for public policy in the economy tomorrow is to adapt regulations as market conditions and consumer demands change.
Regulation and antitrust are alternatives for dealing with problems that force compromises and acceptance of second with market power.
The costs of regulation are higher than the benefits.
The hallmark of natural administration and compliance as well as the (dynamic) monopoly are created by high fixed costs and negligible marginal costs.
Natural monopolies have economies of scale.
Subsi ucts and technology may be required for price regulation.
As regulation was relaxed, these dies, profit regulation may induce cost escalation, and industries became more competitive, output increased, output regulation may lead to quality degradation.
All costs are not implied by recent experiences with deregulation.
There are decisions about what regulation should end.
If market and how to regulate must be reexamined, regulation is appropriate.
Prior to 1982, AT&T kept local phone rates low because they would be dizing them from long-distance profits.
Taxi fares are regulated in most cities.
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