4 ms·

While I don't like paying a lot, and I wish my Internet service were faster, I think the article was sensationalist to the extreme, and remarkably light on fact

While I don't like paying a lot, and I wish my Internet service were faster, I think the article was sensationalist to the extreme, and remarkably light on facts. The author hasn't provided any reason for us to believe that prices or services should be comparable between countries. First and foremost, prices are dictated by the value that people attach to a product. If Americans value, say, TV more, than economics would predict that Americans would therefore pay more for it. And I think that the examples of telephone prices are cherry-picked based on structural differences, or just plain wrong. Communications rates have plummeted since then. I remember back in '84 people would say, "you've got a long-distance call from Xyz". Today, nobody cares if it's long distance. In the late '80s, when my wife immigrated from China, she could only afford to talk to her parents every month or so, because the international phone rates cost several dollars per minute. Today she talks to her dad -- with video! -- on a whim, because it's free. And the price of telephone-quality audio is negligible (~$0.02/minute).

mikeash 14y ago
Prices are only partially dictated by the value that people attach to a product. In a competitive market, prices are dictated heavily be the inherent underlying cost. When a lot of businesses compete with each other, prices get driven down regardless of how much people valeu the stuff, until they hit a point where they can't go down any further. The real problem with US telecommunications is that the market is not really competitive. We have four national cell carriers who appear to be pretty big on collusion, and most places only have one or two options for high-speed home internet access.
- CWuestefeld 14y ago
  In a competitive market, prices are dictated heavily be the inherent underlying cost. This is false. The relationship between cost and price is weak. At the expensive end, prestige brands push prices of goods to the stratosphere (think women's handbags). At the cheap end, it's still quite common for prices to decline below cost. For example, consider cell phones or video game consoles, and of course the old standby example, razors. Each of these products is sold below production costs, but by using lock-in, the vendor can recover the loss through sales of proprietary goods later (monthly fees; licenses in game sales; razor blades, respectively).
  - ghaff 14y ago
    At least according to this paper, the razor and blades story is something of a myth http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1676444 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1676444 (Though your basic point is still quite valid.)
  - mikeash 14y ago
    Cell phones are not sold below cost. You can only get them at a "below cost" price when buying them with a contract which is typically worth $1500+. It's simply deferred payment, not selling below cost. The key here is that paying the additional money later on is not optional. They will charge you fees, hit your credit, send debt collectors after you, and could potentially sue you if you don't pay. It's true for video game consoles, occasionally, but the consoles are not very useful without games, which they make plenty of money on. The overall average price paid by customers over the lifetime of their purchases is correlated fairly well with the cost of making the stuff. The same goes for razors, printers, and whatever else you care to find that follows this model. In any case, these are the exception, not the rule. The price of things I normally buy, like food, clothes, gasoline, electricity, and yes, electronics, are strongly based on their costs. Prestige brands can be sold well above cost precisely because luxury brands become less competitive. Cheap handbags are basically fungible, but luxury ones aren't. When people want an LuxuryCo handbag, they want that, not an equivalent knockoff brand. When it comes to telecommunications, you can see this happen in competitive markets like hosting providers. The price you pay for a server is pretty strongly linked to the cost of running that server. Dialup ISPs followed the same curve, ultimately ending up with service that was basically free (often ad-supported) because it cost so little to provide, because dialup was a competitive market. Home broadband generally isn't in the US, resulting in prices which can substantially exceed the costs of running the service. In places with more competition, prices more closely match the costs. To quote the All-Knowing Wikipedia: "In perfect competition, any profit-maximizing producer faces a market price equal to its marginal cost (P=MC). This implies that a factor's price equals the factor's marginal revenue product." http://en.wikipedia.org/wiki/Perfect_competition http://en.wikipedia.org/wiki/Perfect_competition Of course, you never get perfect competition in the real world, but that's just my point: to the extent that prices don't match costs, it's because competition isn't perfect. The less competitive a market, the less the correlation between prices and costs.
hythloday 14y ago
If Americans value, say, TV more, than economics would predict that Americans would therefore pay more for it And in a free market, the price signal that creates would incentivize other suppliers to start offering more, which would push the price down until it was roughly equal to the French rate. Why doesn't that step happen?
- CWuestefeld 14y ago
  That's sorta true, but it's overly simplified. You're not considering price elasticity. It would seem that the French are more sensitive to price changes than Americans. That is, as price increases in France, it's hitting a sharper decline in quantity demanded than would be observed in the American market. I don't know what the actual numbers here are, just that this is micro-economic theory as I understand it. But in any case, I disbelieve (at least in part) that telephone rates (I don't know about other services) are higher in the USA. I base this on my experience of having just bought two years of domestic service for well under $10/month, and with international calls being cheap to the point of negligible. Moreover, with skype and other services being free, the bottom falls out of any comparison.
  - zanny 14y ago
    Phone communication has been a broken industry for a decade. We have been fully capable of making the whole thing voip using network lines if we had non-crap internet in the first place. If like the topic said, we had fiber to the home, we would have a single internet bill plus some service to provide "rentals" like netflix for shows and movies and that is it. The false split 3 way package deals are already a broken market because they assume you can't get it all under just one of those. The reason the French rates are so low is because they have competition. I couldn't start an ISP in my area if I wanted to because Verizon owns the phone lines and Comcast owns the cable lines. I would need to lay everything by hand, but even that I would consider not being much of a problem anymore - if you took every "town" of 3k+ in the country you could easily have local ISPs lay fiber channels and fiber to the home for everyone in each community and pay it off with $60 a month service considering the per foot cost of fiber cable is lower than the going rate of coaxial was back in the 70s when cable tv took off. It is purely a fixed game. You can't introduce competition to the system so you can't make a prediction on the reactionary effects of American consumers because that isn't happening in the first place. On the topic of phone rates, I paid $250 for a 2 year 5000 minutes prepaid tracfone. It is the best cellular rate I could get considering I infrequently call anyone via traditional means and not over some VOIP service.
Retric 14y ago
Free Markets don't work like that. If you charge 100$ for a bottle of water and most people charge 2$ than you end up selling far fewer bottles of water. Only the fact that we don't have a free market for high speed internet has kept prices so high and service so low.
- bencxr 14y ago
  I agree. Perhaps the "free market" effect is considerably weaker here perhaps due to the popularity of subsidized phone plans which lock in consumers and hide the real costs. To make matters worse, wireless service cannot be compared with price per mb alone, as there is also a bandwidth quality/coverage factor to look at.
  - zanny 14y ago
    It is weaker for plainer reasons, in that the costs associated with phone, tv, and internet are lay cable once and then reap profits. The costs of maintaining the router farms and fiber lines are paltry compared to the costs of buying the servers and laying the fiber in the first place. That is why the cartel of providers is as bad as it is in the US - most localities sold their phone and cable lines to private businesses so they never had to recoup the costs of laying lines, and thus no one can compete with them because they had an unfair advantage from the get-go, and they have their hands in the pockets of every local and state government to keep anyone else from even getting permits to try putting down fiber. Sonic and Google are two rare exceptions to that rule.
- Florin_Andrei 14y ago
  A "free market" concept in it's pure-bred form does not and cannot exist. You either have some form of government control, or you get a monopoly/duopoly/plutocracy situation that skews things around. This is exactly what's happening now with telcos in the US. Time to crack the whip and restore sanity in these markets. The telcos have become a law unto themselves.
  - zanny 14y ago

mikeash 14y ago

Prices are only partially dictated by the value that people attach to a product. In a competitive market, prices are dictated heavily be the inherent underlying cost. When a lot of businesses compete with each other, prices get driven down regardless of how much people valeu the stuff, until they hit a point where they can't go down any further. The real problem with US telecommunications is that the market is not really competitive. We have four national cell carriers who appear to be pretty big on collusion, and most places only have one or two options for high-speed home internet access.

CWuestefeld 14y ago
In a competitive market, prices are dictated heavily be the inherent underlying cost. This is false. The relationship between cost and price is weak. At the expensive end, prestige brands push prices of goods to the stratosphere (think women's handbags). At the cheap end, it's still quite common for prices to decline below cost. For example, consider cell phones or video game consoles, and of course the old standby example, razors. Each of these products is sold below production costs, but by using lock-in, the vendor can recover the loss through sales of proprietary goods later (monthly fees; licenses in game sales; razor blades, respectively).
- ghaff 14y ago
  At least according to this paper, the razor and blades story is something of a myth http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1676444 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1676444 (Though your basic point is still quite valid.)
- mikeash 14y ago
  Cell phones are not sold below cost. You can only get them at a "below cost" price when buying them with a contract which is typically worth $1500+. It's simply deferred payment, not selling below cost. The key here is that paying the additional money later on is not optional. They will charge you fees, hit your credit, send debt collectors after you, and could potentially sue you if you don't pay. It's true for video game consoles, occasionally, but the consoles are not very useful without games, which they make plenty of money on. The overall average price paid by customers over the lifetime of their purchases is correlated fairly well with the cost of making the stuff. The same goes for razors, printers, and whatever else you care to find that follows this model. In any case, these are the exception, not the rule. The price of things I normally buy, like food, clothes, gasoline, electricity, and yes, electronics, are strongly based on their costs. Prestige brands can be sold well above cost precisely because luxury brands become less competitive. Cheap handbags are basically fungible, but luxury ones aren't. When people want an LuxuryCo handbag, they want that, not an equivalent knockoff brand. When it comes to telecommunications, you can see this happen in competitive markets like hosting providers. The price you pay for a server is pretty strongly linked to the cost of running that server. Dialup ISPs followed the same curve, ultimately ending up with service that was basically free (often ad-supported) because it cost so little to provide, because dialup was a competitive market. Home broadband generally isn't in the US, resulting in prices which can substantially exceed the costs of running the service. In places with more competition, prices more closely match the costs. To quote the All-Knowing Wikipedia: "In perfect competition, any profit-maximizing producer faces a market price equal to its marginal cost (P=MC). This implies that a factor's price equals the factor's marginal revenue product." http://en.wikipedia.org/wiki/Perfect_competition http://en.wikipedia.org/wiki/Perfect_competition Of course, you never get perfect competition in the real world, but that's just my point: to the extent that prices don't match costs, it's because competition isn't perfect. The less competitive a market, the less the correlation between prices and costs.

hythloday 14y ago

If Americans value, say, TV more, than economics would predict that Americans would therefore pay more for it And in a free market, the price signal that creates would incentivize other suppliers to start offering more, which would push the price down until it was roughly equal to the French rate. Why doesn't that step happen?

CWuestefeld 14y ago
That's sorta true, but it's overly simplified. You're not considering price elasticity. It would seem that the French are more sensitive to price changes than Americans. That is, as price increases in France, it's hitting a sharper decline in quantity demanded than would be observed in the American market. I don't know what the actual numbers here are, just that this is micro-economic theory as I understand it. But in any case, I disbelieve (at least in part) that telephone rates (I don't know about other services) are higher in the USA. I base this on my experience of having just bought two years of domestic service for well under $10/month, and with international calls being cheap to the point of negligible. Moreover, with skype and other services being free, the bottom falls out of any comparison.
- zanny 14y ago
  Phone communication has been a broken industry for a decade. We have been fully capable of making the whole thing voip using network lines if we had non-crap internet in the first place. If like the topic said, we had fiber to the home, we would have a single internet bill plus some service to provide "rentals" like netflix for shows and movies and that is it. The false split 3 way package deals are already a broken market because they assume you can't get it all under just one of those. The reason the French rates are so low is because they have competition. I couldn't start an ISP in my area if I wanted to because Verizon owns the phone lines and Comcast owns the cable lines. I would need to lay everything by hand, but even that I would consider not being much of a problem anymore - if you took every "town" of 3k+ in the country you could easily have local ISPs lay fiber channels and fiber to the home for everyone in each community and pay it off with $60 a month service considering the per foot cost of fiber cable is lower than the going rate of coaxial was back in the 70s when cable tv took off. It is purely a fixed game. You can't introduce competition to the system so you can't make a prediction on the reactionary effects of American consumers because that isn't happening in the first place. On the topic of phone rates, I paid $250 for a 2 year 5000 minutes prepaid tracfone. It is the best cellular rate I could get considering I infrequently call anyone via traditional means and not over some VOIP service.

Retric 14y ago

Free Markets don't work like that. If you charge 100$ for a bottle of water and most people charge 2$ than you end up selling far fewer bottles of water. Only the fact that we don't have a free market for high speed internet has kept prices so high and service so low.

bencxr 14y ago
I agree. Perhaps the "free market" effect is considerably weaker here perhaps due to the popularity of subsidized phone plans which lock in consumers and hide the real costs. To make matters worse, wireless service cannot be compared with price per mb alone, as there is also a bandwidth quality/coverage factor to look at.
- zanny 14y ago
  It is weaker for plainer reasons, in that the costs associated with phone, tv, and internet are lay cable once and then reap profits. The costs of maintaining the router farms and fiber lines are paltry compared to the costs of buying the servers and laying the fiber in the first place. That is why the cartel of providers is as bad as it is in the US - most localities sold their phone and cable lines to private businesses so they never had to recoup the costs of laying lines, and thus no one can compete with them because they had an unfair advantage from the get-go, and they have their hands in the pockets of every local and state government to keep anyone else from even getting permits to try putting down fiber. Sonic and Google are two rare exceptions to that rule.
Florin_Andrei 14y ago
A "free market" concept in it's pure-bred form does not and cannot exist. You either have some form of government control, or you get a monopoly/duopoly/plutocracy situation that skews things around. This is exactly what's happening now with telcos in the US. Time to crack the whip and restore sanity in these markets. The telcos have become a law unto themselves.
- zanny 14y ago