osewalrus (osewalrus) wrote,
osewalrus
osewalrus

The Gods of the Copybook Headings Take on Ayn Rand's Gods of the Marketplace

Kipling, of course, meant the Gods of the Copybook Heading as a rebuke to socialism, and would no doubt find the competitive theories of Cato, Progress and Freedom Foundation, and my other opposite numbers to fall into the realm of the Gods of the Copybook headings.

But reality is not so easily denied, as demonstrated in this latest GAO Report on the lack of competition for business customers in major urban areas. Unlike the FCC, which jiggers the numbers so that we appear to be veritably awash in competition, the GAO finds that competition is not a cummin' in, lawd sing cuckoo! It's more like "monopoly is cummin' in, lawd sing 'we're screwed!'"

AS I PASS through my incarnations in every age and race,
I make my proper prostrations to the Gods of the Market Place.
Peering through reverent fingers I watch them flourish and fall,
And the Gods of the Copybook Headings, I notice, outlast them all.

--Rudyard Kipling

In the 16 Metro areas studies, the GAO found that telco competition for business customers (called "special access" customers in telco lingo) was (a) never very large, and (b) decreasing at a consistent rate in areas the FCC deregulated on the grounds they were sufficiently competitive. As GAO notes, the FCC does not go back and reregulate if the market drops below the "competitive trigger level" for deregulation, as the FCC thinks this would not be cost effective and the costs would offset the gains.

Unsurprisingly, in the deregulated areas where competition has dropped since deregulation, prices have risen substantially. This is shocking only to people who failed to stay awake in Econ 101, or who follow the Holy Church of the Libertarian NeoClassical Economy. Under the tenats of the Holy Writ, deregulation should produce competition. So the fact that deregulation has caused a drop in competition is the sort of heresy that usually forces my opposite numbers to stuff their fingers in their ears and start chanting Atlas Shrugged from memory.

Now allow me to argue the other side for a moment. Prices might well be lower under price caps than deregulated prices, because the regulated price did not genuinely reflect the price of the market. For example, incumbents might have refused to invest in physical plant because they could not recoup the cost of build out. Alternatively, they might refuse to invest if commercial rivals can capture the benefit of the build out by demanding access to the underlying physical facility. In these cases, the cost should after deregulation, because the rise in cost reflects the genuine market reality rather than an abuse of market power.

A good theory, which is why it is important to look at revenue and profitability per subscriber. If customers have choice, they will switch and therefore prevent an incumbent from passing through its full costs to a customer unless that cost is reflected by everyone in the market. In a genuinely competitive market, sellers seek to hold down price as long as possible to capture customers, the "making it up on volume" theory. While a seller cannot sell for any length of time at a loss (unless the specific item is a "loss leader" designed to bring in more revenue), a seller in a competitive market will try to avoid raising prices for as long as possible. In such an environment, revenue per subscriber should fall, even if prices increase. By contrast, if revenue per customer increases as a seller raises prices, and does not suffer significant loss of customers, that is a sure sign of a non-competitive market.

The GAO found that while revenue per subscriber did, indeed, fall, it fell far less in the supposedly competitive regions than in regions subject to price caps. In other words, regulation did not artificially constrain firms from selling at the genuine competitive level. Unregulated firms -- while forced to invest some revenue elsewhere -- have been able to raise prices to reduce the drop in revenue per subscriber in a manner superior to the "gauranteed rate of return" promised to regulated telephone providers.

And a disturbing trend wrt the elimination of competition from AT&T and MCI. Since these two, the largest competitiors, were absorbed by incumbent bells, revenue per subscriber in deregulated areas has increased measurably based on available data. In other words, eliminating the two largest competitors has allowed the remaining incumbent firms (which do not compete against each other) to raise prices.

Again, this shocks no one except the NeoCons who believe that the Competition Fairy brings you low rates and and good service if you kill pro-competitive regulation and put it under your pillow. Of course, throughout 2005, many states actively deregulated their own laws that would allow them to cushion their state rate payers from the abdication of federal regulation. Why did they do this? Because, according to the Gods of the Marketplace, we are just awash in competition and therefore we no longer need these pesky regulations, that just prevent the Market, in its infinite wisdom, from providing us with low prices, better services, and ever more competition.

Needless to say, the regulators did not lack for warnings from folks with a dash of Econ 101 and less religious faith in the Competition Fairy. Alas, as Kipling observed:

With the Hopes that our World is built on they were utterly out of touch,
They denied that the Moon was Stilton; they denied she was even Dutch;
They denied that Wishes were Horses; they denied that a Pig had Wings;
So we worshipped the Gods of the Market Who promised these beautiful things.

Still, I may hope to see in my time:

Then the Gods of the Market tumbled, and their smooth-tongued wizards withdrew
And the hearts of the meanest were humbled and began to believe it was true
That All is not Gold that Glitters, and Two and Two make Four
And the Gods of the Copybook Headings limped up to explain it once more.
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