Monopoly: The good the bad and the not-so-ugly

Posted on April 15, 2008  /  0 Comments

The colloquium notes

Lara Alawattegama (LA): Monopoly means ‘a market with a single supplier’

Why a monopoly happens:
1. No close substitutes
2. Legal barriers to entry
3. Resource barriers
4. Unfair competition -predatory pricing

Rohan Samarajiva (RS) : Lack of competition leads to monopolies. Microsoft Windows is an example where none of the above characteristics applied

Chanuka Wattegam (CW): Is LIRNEasia a monopoly?

RS: What is LIRNEasia’s market?

No technical barriers for anyone to entry to the LIRNEasia market. So the answer is no.

LA: Natural Monopoly is what you get when the market is too small for a competitor to offer a lower priced product. (dis-economies of scale ) So a new firm may have to sell at a higher cost and will not be successful unless that adds value (i.e. improved technology). A natural monopoly may not continue forever.

Example of a natural monopoly? The distribution of piped water.

Why the distribution of electricity, water and telecom are different?

RS: To produce electricity in Laxapana and transmit to Colombo is cheaper. Doing same with water is not.

RS: Alfred Kahn realised air travel between San Fransisco and LA was cheaper due to lack of regulation. No substantial entry costs so the business flourised. However airports were a source of monopoly in terms of gates etc. The other issue was customers see airlines more as a network. So offering the shuttle services is possible for smaller players, but long haul flights was not.

Natural monopolies are time bound. They fall with changing environment by introduction of new technologies etc.

LA: Some once believed telecom market is a natural monopoly due to high cost and large economies of scale. Not anymore. Average costs fall with advanced technology.

Harsha De Silva (HD): There is a difference between Long run and short run average costs. What matters is marginal cost and not average cost.

RS: New technologies may increase the costs for incumbent. So incumbent has an incentive not to use new technology unless forced by the competition. (eg AT&T not using transistor till others started though they invented it).

Market will continue to grow if Marginal revenue (MR) is greater than MC.

LA: Because of the interconnection obligations large operators have an advantage over the smaller operators. Economies of Scale in one market may lead to cross subsiding and vertical integration.

RS: Cross subsidizing happens everywhere but hardly anyone complains. It becomes a issue only in regulated markets. (eg. SLT cross subsidizing their operations through the IDD facilities from 1997-2002.)

Telecom operators can increase prices but not necessarily because of existing competition. Cost of telecom companies have little to do with the existing inflation rate in Sri Lanka.

Joseph Shumpeter declared monopolies are not necessarily bad.

RS: There are arguments where a monopoly creates lazy organization but not always true. Innovations happen. Contestability or threat of entry by others force organisations behave as if there is competition. (eg SLTs behaviour in mid 1990s before the entry of Suntel and LankaBell).

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