Tuesday, December 21, 2010

Market Power and Markets: Comcast and Level 3 Communications

"If it is left to the market entirely, then there shouldn't be any one player with significant market power," says financial analyst Tim Poulus, writing about the peering dispute between Level 3 Communications and Comcast. " And if so, regulation must be put in place."

"Hence, there is a reason for regulators to look at the Internet on a global level," he argues.

With all due respect, almost nothing could be further from the truth: perfect competition or imperfect competition or even regulated competition will always lead to market power, especially in highly capital-intensive industries.

That isn't to say regulation based strictly on market power isn't necessary at some point. Sometimes a virtual monopoly has to be broken up or limited to restore competition to a market once more.

But there always will be market power, so long as consumers are free to choose products they prefer, and so long as the ability to switch providers is there. The reason is about as simple as it could be. People will buy the better products.

Over time, that leads to highly-unequal market power. Look at the market share for just about any product or industry that has matured and you will always find an unequal distribution of revenue, customers or profit margin. Some of us would expect the market share of provider one to be roughly twice that of provider two, as a rule.

The market share of provider two would be twice that of provider three. And as you can imagine, when you are dealing with "doubling," it doesn't take very long to reach the "long tail," in terms of market share.

Apple might well achieve market power with the iPad the way it dominates both music distribution and iPods. That's the way markets are supposed to work: better products, offering higher value, drive out products with lesser value.

At some point, antitrust concerns will be raised of course, and then decisions to cap share growth can happen. Comcast already is subject to such caps. Level 3 has no significant market power. Furthermore, there are other issues than assessments of market power, such as contract law. Just because a firm might be deemed to have market power does not mean its lawful contracts can be voided.

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