cr> local competition lowers costs


Sender: •••@••.••• (Glen Raphael)

This is a response to Dave Ketchum and others who are wondering why some
consumer advocates want open competition between local service providers of
cable, telephone and such.

>It is beyond me how competition fits into the local loop. [...]
>How do competing companies [...] do all this
>more economically than a single company could?

Let's see if I can make this easy to understand.

If the local utility is a "regulated monopoly" then its rates are usually
set by some sort of regulatory agency using "cost-plus" or "reasonable rate
of return" as a guideline. That is, figure out what the cost of providing
the service is, add in a profit margin of, say, 5%, and that's what this
provider is allowed to charge. This is really the only vaguely practical
way to do things if you aren't willing to let the market set prices, so it
is what we usually do.

Okay, now suppose you are a manager at the plant and a new technology or
process comes to your attention which might cut costs by $10 per customer
per year. If your service were being provided in an unregulated free
market, that would be $10 per customer additional revenue. This would add
to your bottom line. It would allow you to cut rates to steal business away
from your competitors. it would allow you to give yourself and your
employees a raise, it would allow you to invest more and increase
dividends. In short you WOULD adopt this new technology and your costs
would decrease over time because of it.

But if your prices are set using cost-plus, there's no reason (from that
manager's point of view) to switch. If you cut cost by $10 per year the
regulatory agency will probably decrease the price you are allowed to
charge by about $10 per year. So why bother? In fact, you are only
guaranteed to have a bigger budget next year if you find ways to INCREASE

It is due to this incentive problem that competitive local utilities are
generally cheaper than regulated monopoly local utilities. The cost of
maintaining another network turns out to be trivial compared to the savings
that result when almost every employee has a personal incentive to avoid
waste and promote efficiency. I believe the term coined by the economists
for this effect is "X-efficiency."

Anyway, when you compare competitive electric companies or cable companies
to monopoly ones you invariably find not just lower *prices* but lower
*costs* as well; if the traditional economy-of-scale argument were correct
you would find lower per-unit costs in the monopoly situation, but you do
not. Therefore, most of what we think of as "natural monopolies" are not.
They are artificial monopolies created via regulations designed to keep out

As for cluttering up the street, private suppliers tend to share lines with
the existing services, and to underground them wherever practical. Most
people have at least two independent networks to the home today and many
have three (telephone, electric, cable). In the case of Lubbock, Texas --
which has two competing electricity networks -- one company shares wires
and maintenance expenses with the phone company, the other shares with the
cable company. And keep in mind that some of the new technologies which are
not being used have the effect of *reducing* wiring. For instance, why
string cable to a building far outside of town when you can beam info there
over radio or via satellite? The current regulatory environment usually
makes it illegal for a large apartment complex owner to set up her own
mini-cable television network, but that would clearly cut costs over having
each resident deal with the city's local monopoly provider and run wires
from the central hub.

Local service competition will cut costs and improve service. If we want to
see access improve and costs come down, we need to fight to deregulate
local utilities and allow open competition among them.

Glen Raphael

Glen Raphael, •••@••.•••  NewtPaint - the Newton paint program!
President, Stanford/Palo Alto Macintosh User's Group (SMUG)
<A HREF="">Glen's World</A><BR>

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