Monday, September 13, 2004

Perfect Competition in Network Industries

This analysis is right on. It's from Ray Gifford, who used to chair the Colorado Public Utilities Commission:
There is an unstated supposition that you need multiple firms, all being price-takers, for "competition" to be deemed a success. For this misapprehension, I'd love to blame Mark Cooper, but even Mark's voice isn't loud enough to be that pervasive.

The lament that there might be only two, three or four competitors in communications markets should not be. It should be a celebration of exactly what network industries yield. The competition that matters here is the Schumpeterian competition for platform dominance over time, not the short-term static competion that neo-classical economic analysis can capture. Furthermore, as Vernon Smith and his colleagues have shown, so long as the market default rules are right -- and so long that there is freedom to devise suitable long-term contract terms and conditions, then an industry can be quite competitive with only two -- two! -- players. [This is not true in all cases, necessarily, but it does demonstrate that a competitive equilibrium can be achieved in markets with very few firms.]

Thus, the regulators' challenge in a (limited) multiple platform world should be in getting the default contract rules right, not on the continued manipulation of contract and property rights to achieve some short-term vision of perfect competition. That, and disabusing themselves of the pernicious orthodoxy of perfect competition.


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