Competitive markets show limitations
Published: March 22 2011 22:35 | Last updated: March 22 2011 22:35
Competitive markets have their limits. This economic principle has been demonstrated this week by both telecom operators in the US and a regulator in the UK.
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Deutsche Telekom is selling out its US mobile operations to the larger AT&T because 34m customers is too few to compete successfully. But when the old American Telephone and Telegraph Corporation was broken up in 1984, the whole idea was that smaller companies would drive the industry forward.
It did not work out that way. The eight new telecom operators and their start-up rivals soon started merging. The industry is now heading towards an effective duopoly. And analysts whisper that users would be better served with a single national network for the next generation of mobile phone technology. The huge economies of scale in capital investment and marketing make this network look like what economists call a natural monopoly.
The fervour for freer markets also inspired the 1990 break-up of the UK electricity industry (traditionally regulated as a natural monopoly), but mighty market forces were not unleashed. As Monday’s report from Ofgem, the UK energy regulator, pointed out, the six big companies still give lazy customers a bad deal. More fundamentally, several rejigs of the pricing system have left the country with inadequate investments in large power plants. That should not be surprising. At any instant, competitive markets set fair prices, but they can give few hints about many crucial issues: safety, pollution, diversification of power sources, national self-sufficiency and carbon emissions. These are topics for technical and political debate. Complex regulation is inevitable.
So the new structures in the US telecoms and UK electricity industries did not work as proponents hoped; but the shake-ups were not necessarily in vain. They spurred managers to improve services and abandon outmoded practices. Sometimes regulatory changes can do the work of markets.
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Copyright The Financial Times Limited 2011.
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