Regulation of the internet

Question 1

Why do we regulate the internet?

Answer 1

Primary justification: economic
* Goal: make the pie as big as possible (desirable regardless of how you divide up the pie)
* Measure: produce whenever benefits ≥ cost
* First welfare theorem of economics: perfect competition tends to meet that goal
Implication: focus regulation on where markets fail

Other justification: classical liberal theory
* Individuals create the state/give it limited power
* Individuals should be left free whenever possible
* Tied up in John Locke philosophy etc.
* Implicit in this is that if gov doesn’t have a good reason for doing something, you should be able to do whatever you want

Question 2

Why is monopoly bad?

Answer 2

• Lack of Competition: In a perfectly competitive market, numerous sellers offer similar products or services. This competition forces sellers to lower their prices or improve the quality of their offerings to attract customers. When price equals the cost of production, resources are efficiently allocated, and consumers benefit from lower prices and a wide range of choices.
• No Alternatives for Consumers: In a monopoly, there is only one provider of a specific good or service, leaving consumers with no alternatives. This lack of choice allows the monopolist to dictate the terms of the market, including price and quantity.
• Higher Prices: Monopolies can raise prices without the fear of losing all their customers, as there are no competitors offering the same product or service. This allows them to charge higher prices than they could in a competitive market, resulting in reduced consumer welfare and increased profits for the monopolist.
• Quantity Tradeoff: Monopolists face a tradeoff between the price they charge and the quantity of goods or services they provide. As they increase prices, they may lose some customers but make more money on the remaining customers. This tradeoff often results in a monopolist producing a lower quantity of goods or services than would be produced in a competitive market, leading to scarcity and further exacerbating the high prices.
• Inefficiency: Monopolies can lead to inefficiency in several ways. First, they may not have the same incentives as competitive firms to reduce costs and improve production processes. Second, the monopolist’s pricing strategy can result in deadweight loss – a reduction in economic welfare caused by the misallocation of resources. This occurs when the monopolist charges a price higher than the marginal cost of production, leading to a lower quantity being produced and consumed than in a competitive market.
• In summary, monopolies price too high and produce too little!

Question 3

Classic source of natural monopoly?

Answer 3

Declining average cost
* Bigger cos. can produce more cheaply, which allows them to underprice competitors
* Customers leave smaller competitors until only the biggest one remains
* Even markets that begin as competitive collapse into monopolies
* So the declining average unit average cost of a product is classical cause of natural monopoly, because it means bigger company can produce at lower cost, which means they can charge a lower price and still break even and survive. Because they can do this, they will keep stealing business from the other side until the other side dies.

Question 4

What causes declining avg cost?

Answer 4

Two components to cost
* Fixed costs: up-front capital costs used for multiple units of output (e.g., chip design, pharmaceuticals)
* Variable costs: costs associated with particular units of output (e.g., raw materials, electricity, labor)

Each of the above has diff impact on average cost (U-shaped curve)
* Variable cost initially places downward pressure on avg cost that increasingly turns upward
* Fixed cost places constant downward pressure on avg cost, but the effect decays
* In the initial time when they’re both pointing down, you get declining costs. But when variable costs start turning up, it’s a question of which is bigger.
* If fixed costs are sufficiently large, avg cost declines over the entire industry output

Question 5

The regulation of local telephone networks has traditionally been based on four primary rationales:

Answer 5

1. The belief that local telephone service is a natural monopoly
2. The concern that network economic effects will give incumbents decisive advantages
3. The dangers that the incumbent will
   engage in vertical exclusion to deny access to providers of complementary
   services, and
4. The purported dangers of “ruinous” competition