Market Power

Musings by an academic economist on the power of markets and the power over markets.

Wednesday, November 24, 2004

Deregulation, Sioux City Style

The Iowa Utilities Board has decided to deregulate local telephone service in 20 markets in Iowa – but not my home town of Sioux City. See here for some details.

Here is a quote from the article:

“In a 2-1 vote, the board ruled that the Sioux City market doesn't have enough competition to ensure that deregulation would help consumers.”

But there are firms that already exist in Sioux City who could provide local phone service:

“A Qwest spokeswoman, Kara Rovere, said she's disappointed with the board's decision about Sioux City, but pleased with the ruling on the other markets."There are, I believe, 18 companies competing with us to provide service in (Sioux City). We believe it's very competitive," she said.”

Here’s a retort from a “consumer advocate”:

“John Perkins, the state government's consumer advocate, said the case made by big companies like Qwest is flawed because nearly all of the other service providers are much smaller and serve a niche clientele."If deregulation occurs in a market where there is truly not competition, then the incumbent local exchange carrier, whether it's Qwest, Iowa Telecom or Frontier, (has the ability) to raise their basic phone rates to whatever they want (emphasis added) and you the customer have nowhere to go," he said.”

The “consumer advocate” admits that there are firms that compete with Qwest in Sioux City. How hard can it be for these firms to provide service to customers who want it?

This “consumer advocate” needs a lesson in the principles of market power. I offer these two to him for no charge:

1. Firms with market power cannot charge whatever they want because consumer demand constrains these firms. A firm with market power can charge a higher price than a competitive firm, but it can’t charge whatever it wants. I would hope a consumer advocate would understand something about consumer demand.

2. When a firm charges a price that allows it to make economic profits (a return over and above the opportunity cost of the resources owned by the firm), it opens the door to competition from other companies, companies that the advocate admits exists in the Sioux City market. Customers may have nowhere to turn in the short run, but over time, they do have places to turn. Since these businesses already exist, my bet is the short run is indeed a short period of time. These businesses may be small, but they can become big if they are run well enough and keep costs low.

Lastly, the board wouldn’t deregulate Sioux City, but it saw fit to deregulate local phone service in Whiting, Ia. Whiting? WHITING??? Whiting is a town 30 miles south of Sioux City about 3 miles off of I-29. Whiting has fewer than 1,000 people in it. It might have a gas station, but I don’t remember (it’s not one of the places I often stopped when traveling down the interstate. Onawa is just a few miles down the road).