From: chris@suite.sw.oz.au (Chris Maltby)
Subject: Re: Cream skimming considered beneficial
Organization: Softway Pty Ltd
Distribution: aus
Date: 16 Dec 92 23:48:19 GMT

In <summer.724484681@murillo> summer@mullian.ee.mu.OZ.AU (Mark Summerfield) writes:

>Telecom's service, performance and efficiency has been
>steadily improving for some years *without* competition.

Sure, but they've certainly sped up the pace suddenly... Maybe they
finally worked out what had been slowing them down all those years,
or maybe they suddenly got serious about it. Maybe it's a coincidence,
but the threat and the actuality of Optus came along around the same time...
Draw your own conclusions.

>Here is a quick summary of the arguments as I see them:

>1)  A natural monopoly exists in telecommunications.  It is a fact that the
>    larger the customer base, the cheaper the cost of provision per customer,
>    all else being equal.

I won't disagree with the idea of a natural monopoly on connections to the
network, and for the same reason why no-one proposes competition in the
supply of sewage connections. That doesn't mean that there is a natural
monopoly on anything other than the link between my house and the exchange.
At the exchange I can already choose a range of extra price services, and
beyond that too. My monopoly supplier has done this in a small way to date.
I expect that (just like in the computer industry) the range of choices
to mushroom as the technology becomes cheaper and cheaper. Why should I
have to wait until some huge monolith gets around to offering the service
I want when I can get a nimble competitive service to do it tomorrow...

Note that this actually increases the size of the telecommunications pie.
Why does Telecom assume it will lose business from competition? If the
market gets bigger because the services are more attractive then everyone
wins, no? BTW, this seems to be what's going on at present in the Mobile
market.

>2)  Thus, the *theoretical* cheapest service, averaged over all customers,
>    is provided by a monopoly operating at maximum efficiency, and minimum
>    profit.

As long as you only want the cheapest service perhaps. But what provides
the discipline for the maximum efficiency, minimum profit. Aren't these
things mutually exclusive with the idea of monopoly? Isn't that what 20
or so years (at least) of experience with Telecom (and the PMG before)
shown _beyond doubt_!

>3)  Since no company actually operates at this theoretical cheapest level,
>    the question is "how does one achieve the *practical* cheapest service?"
>    For example, a duopoly sharing customers has a higher theoretical cost,
>    since neither company has the maximum possible customer base.  However,
>    it may be argued that the presence of competition causes both companies
>    to be more efficient that they otherwise would be, thus resulting in
>    a *practical* lower cost than the monopoly.  Another way to reduce the
>    actual cost of provision is to maintain a monopoly, but *force* the
>    provider to become more efficient by legislating economic restraints.
>    This was being done with Telecom, which has been forced to keep its
>    price rises below the CPI for some years now.

I hear what you're saying. I think you are leaving out the magic bit about
customer choice. None of the above obligates the monopoly to find out what
its customers want so that it can protect its market share. If you can
work out how to do this in a monopoly arrangement the country has a very
important job for you. Hint: the answer is not "a committee".

>    There is a large measure of economic ideology contained within this
>    particular point, since it involves a choice between more centralised
>    control, and a more free-market approach.

Agreed.

>4)  Enter the issue of cross-subsidisation.  Lemma: Telecommunications
>    is a vital service in modern society, and thus must be available and
>    affordable to all.  Proof: None.  Which doesn't seem to stop most people
>    agreeing on this point in general terms.  Once again, ideology enters
>    the picture.  The more "socially" minded argue that if some people
>    who are better off are subsidising those who are not, then that is
>    a Good Thing.  The more "economically rational" argue that it is an
>    issue of "micro-economic reform": if the operating costs of the 
>    business interests whose performance drives the economy are being
>    artificially raised by hidden cross subsidies, then ultimately the
>    whole economy suffers.  This can be reduced to a social argument by
>    concluding that having reformed the economy into such a state that
>    it is vibrant and competitive, everybody benefits, and thus the
>    desirable Good Thing is ultimately still achieved.
>
>    Personally, I (and obviously a number of others) have a problem with
>    the latter argument.  The extra degree of theoretical abstraction,
>    combined with the enormous increase in the number of variables involved
>    in determining the eventual outcome, to my mind increases the risk
>    involved in implementation.  Experiments are all very well as tests
>    of theory, so long as nobody stands to get hurt -- at least, not
>    anybody who didn't volunteer!

I have a severe problem with those kind of economic rationalist arguments
myself. I don't see why this dichotomy applies to cross-subsidisation of
phone calls. I agree that CSOs exist and I expect to pay taxes according
to my means to pay for them. That doesn't mean that I don't care what they
cost and that I think I should pay them when I make phone calls. Not even
hardened socialists think that the telephone is the right way to raise taxes
to pay for social security.

>I believe more centralised control is appropriate [for some industries]
>(e.g. energy provision, telecommunications, many forms of transport).

I think the distinguishing mark is whether the industry manufactures
a generic commodity (eg electricity) or a complex product. That's why
the exchange connection is and will remain a monopoly, but the provision
of telecommunications services should be competitive. I don't think
anyone would describe even the basic telephone service as a simple
commodity anymore.

>I seem to have gone on longer than I intended, which means that probably
>no-one will read this sentence! :-)

No, at least I made it.

One final point for those still reading. One of the arguments used against
economic efficiency in (particularly government) businesses is that people
will lose their jobs. I agree that unemployment is a bad thing, but surely
the wrong way to utilise unemployed labour is to have it twiddle its
thumbs in the back of a telephone exchange. I'd much rather pay a bigger
dole and get useful work done, such a re-afforestation, destruction of
feral cats, more railways built... Why do otherwise sensible left-wingers
propose the first solution instead of the second? Ray Loyzaga will now
tell me that it's because those (non-) sensible left-wingers are organisers
in the Australian Communications Union... hmmm.
-- 
Chris Maltby - Softway Pty Ltd		Internet: chris@softway.sw.oz.au

PHONE:	+61-2-698-2322	"I'm waiting for X-Windows to become just that;
FAX:	+61-2-699-9174	 Ex-Windows" - A McGrath.