Must Monopoly Be Controlled?
Sometimes the cure is worse than the disease. Some economists have argued that the
best solution, even in the case of a natural monopoly, may be to live with it. The case for
doing nothing is that attempts to control monopoly will, one way or another, do more
harm than good.
The following FYI describes the case of cable television, a natural monopoly that has
been alternately regulated and deregulated as politicians change their minds about the
appropriate policy.
module 62 Monopoly and Public Policy 621
Cable Dilemmas
Most price regulation in the United States goes
back a long way: electricity, local phone service,
water, and gas have been regulated in most
places for generations. But cable television is a
relatively new industry. Until the late 1970s,
only rural areas too remote to support local
broadcast stations were served by cable. After
1972, new technology and looser rules made it
profitable to offer cable service to major metro-
politan areas; new networks like HBO and CNN
emerged to take advantage of the possibilities.
Until recently, local cable TV was a natural
monopoly: running cable through a town entails
large fixed costs that don’t depend on how many
people actually subscribe. Having more than one
cable company would involve a lot of wasteful
duplication. But if the local cable company is a
monopoly, should its prices be regulated?
At first, most local governments thought so,
and cable TV was subject to price regulation. In
1984, however, Congress passed a law prohibit-
ing most local governments from regulating
cable prices. (The law was the result both ofwidespread skepticism about whether price
regulation was actually a good idea and of in-
tensive lobbying by the cable companies.)
After the law went into effect, however, cable
television rates increased sharply. The resulting
consumer backlash led to a new law, in 1992,
which once again allowed local governments to
set limits on cable prices.
Was the second round of regulation a success?
As measured by the prices of “basic” cable serv-
ice, it was: after rising rapidly during the period of
deregulation, the cost of basic service leveled off.
However, price regulation in cable applies
only to “basic” service. Cable operators can try
to evade the restrictions by charging more for
premium channels like HBO or by offering fewer
channels in the “basic” package. So some
skeptics have questioned whether current regu-
lation has actually been effective.
Yet technological change has begun provid-
ing relief to consumers in some areas. Although
cable TV is a natural monopoly, there is now an-
other means of delivering video programs tofyi
homes: over a high-speed fiber-optic Internet
connection. In some locations, fiber-optic Inter-
net providers have begun competing aggres-
sively with traditional cable TV companies.
Studies have shown that when a second
provider enters a market, prices can drop signif-
icantly, as much as 30%. In fact, the United
States is currently behind on this front: today
60% of households in Hong Kong watch TV pro-
grams delivered over the Internet. What will
these changes mean for the cable TV monopo-
lies? Stay tuned.Stringer/Getty ImagesModule 62 AP Review
Check Your Understanding
- What policy should the government adopt in the following
cases? Explain.
a. Internet service in Anytown, OH, is provided by cable.
Customers feel they are being overcharged, but the cable
company claims it must charge prices that let it recover the
costs of laying cable.
b. The only two airlines that currently fly to Alaska need
government approval to merge. Other airlines wish to fly
to Alaska but need government-allocated landing slots to
do so.Solutions appear at the back of the book.