11/13/2013

Companies Dominating the Internet Market


Recently we studied economic markets that are oligopolies.  The firms in these markets offer similar products, have few firms competing in the market and are difficult to enter. An oligopoly market that came to mind while studying this subject was the cable internet market in the US. My husband worked at a company that marketed services for television, internet, phone, and security companies.  He said across the nation he dealt without about 13 total companies that supplied television and internet services.  While he didn’t deal with every single one, 13 is a very small number of companies across the US to provide these types of services.   

Michael Hiltzik wrote about this very issue in an article entitled, “Cable monopolies hurt consumers and the nation.”  The article discusses that between Comcast and Time Warner Cable, they effectively control roughly 40% of the internet market of the US.  The article went on to explain that Verizon had made an attempt to enter the media market with these two giants, but after less than a decade Verizon decided it did not have the cash to remain competitive and stopped expanding service.  If a company as large as Verizon can’t compete who can?  This clearly points to an oligopoly as two big firms control a large amount of the market share while the barrier to entry as with Verizon is difficult and costly.

The second thing I noticed in the article was how Time Warner and Comcast seemed to share similar price points.  For example it gave a quote on 10 megabit from either one of the companies hovering around $35 per month.  This again points to an oligopoly with companies in the market sharing similar price points. 

Over the last few years, one of the few large companies that are trying to enter the market is internet behemoth Google.  They have begun to roll out their fiber services in two cities in the US.  It will be interesting to see what if any effect Google can have on bringing competition back to the internet marketplace. 

5 comments:

Su Jung Poe said...

There are only a few major internet service providers in the United States. Competition in this industry is forcing the participants to adapt to changes in order to stay competitive. In a recent Article On Timer Warner Cable , Time Warner lost internet subscribers rather than gained internet subscribers during the third quarter of this year. This is interesting because as Quinn stated, Time Warner is one of the biggest providers in the US. Time Warner is said to be considering a merger with another communications firm that already owns a significant share of Time Warner's stock. The internet service provider industry in the United States definitely looks like an oligopoly and seems to continually be moving more in that direction.

The presence of Google fiber internet in US cities will serve only to increase strength of the major providers in the US by driving small local internet service providers out of business because it charges a very low price for fast, reliable internet. I was talking to a friend who used to own a local internet service provider business in Cedar City. He said that once local internet service providers in northern Utah heard that Google fiber was coming in, they packed up and moved their businesses elsewhere. While Google fiber may be good for consumers, in the long run it will hurt competition in this industry and move it further in the direction of being an oligopoly.

Dave Tufte said...

Quinn: 100/100
Su Jung Poe:

One of the things we start to get across at the MBA level is that a firm can operate with one market structure in one market, and a different one in another.

So, locally, most cable companies operate as monopolies. But nationally they operate as an oligopoly.

Oligopoly aside, I'm not surprised at the cash problems that Verizon had. Cable is a business with huge revenues and huge costs, a lot of which come out of cash flow. So I could see it being easy to get into trouble, or to want to get out to avoid trouble.

And, this points out another feature: for all our complaints about the cable industry, it's not a huge profit maker, and the continuing consolidation is a sign that firms are having trouble making it with the economies of scale they already have.

Anyway, back to Quinn's points about the Hiltzik article. Personally, I've never been a fan of cable companies. Having said that, they've been "taking over the world" unsuccessfully for the last 30 years. So my thinking is that they may be a little like the airlines: they have their moments, but they can't get big enough to be consistently successful.

As to the price points, one of the things an MBA student should carry away from the section on game theory is that it's possible for firms to settle on a price point without collusion — as in tit-for-tat getting us away from the worst outcome of the prisoners' dilemma if the game is repeated.

Lastly, the Google bit is interesting. Google is the largest company (outside of finance) to employ a chief economics officer (Hal Varian). He's a very famous microeconomist specializing in game theory and new economy issues (like network externalities). Perhaps they know something that others firms should too.

Dave Tufte said...

Su Jung Poe: 47/50 (Timer Warner)

Condolences on your friend's business ... but I'm not sure how this can be negative.

I think there's a tendency for both Su Jung Poe and Quinn to label the cable companies as an oligopoly with the assumption that being an oligopoly is bad. But, what if you're an oligopoly because that's the only way you can survive?

Managers just don't go out and say "Hey, let's take advantage of our customers! We'll do it by being an oligopoly."

Instead, oligopoly is a symptom of the long-run cost structure. If your long-run average costs slope downward for a long time (relative to your demand), then you'll end up as an oligopoly (or monopoly) no matter what. This isn't a choice, it's a fact.

Yet that doesn't necessarily make you profitable. There are all sorts of oligopolies that have consistent trouble making profits: think about all forms of human transportation. What we know is that they're less profitable when they're less oligopolistic. The same may be true of cable companies.

Ryan Brockway said...

I don't believe that oligopolies are a bad thing. Unless they are breaking the law and colluding they can have just as much competition, if not more, than industries with many firms. I know of many small industries that serve markets of 10-20 million in revenue that are inherently oligopolies. These firms have considerable fixed costs that has to be spread over a small number of units. When a third or fourth competitor enters the market the low profits become losses until one or two go out of business. I assume that this same logic works for the cable companies and airlines as well. A limited amount of profit, kept in check by the oligopoly's prisoner's dilemma, that has to be spread over huge fixed costs. As further evidence of this I will use an example from my own life. When Baja Broadband increased my fee for internet service I immediately started searching for a new provider. Internet service is a commodity to me. You can add all the bells and whistles you want, but the only thing that matters to me is the speed and reliability. These two characteristics of internet service seem to be quite universal so there does not seem to be any way an internet company could increase the relative price and keep me as a customer.

Dave Tufte said...

Ryan Brockway: 50/50

You are right about oligopolies. There is lab evidence that collusion and/or cooperation doesn't work well when you have more than 2 competitors.

Now, part of the point of the section in Chapter 10 on non-cooperative, repeated games is that in oligopolies we may see tit-for-tat as a way to maintain high prices. So it's plausible in your cable example that you could be unlikely to find a better deal.