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The Ubiquity of Consumer Surplus and The Danger of the Telecom Monopolists

By Matthew Yglesias on March 31, 2011 at 4:01 pm

"The Ubiquity of Consumer Surplus and The Danger of the Telecom Monopolists"

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As Karl Smith points out, there’s certainly a huge consumer surplus associated with the Internet that goes beyond its financial “worth.” But I think people are sometimes too quick to point to this sort of thing as undercutting bleak narratives about income trends. After all, consumer surplus is not a new phenomenon.

Think about your standard refrigerator/freezer. It’s sort of a miraculously useful device. Instead of your food turning stinky and rotten, it sits nicely in my fridge. The direct financial value of being able to store leftovers or freeze excess raw ingredients is significant, over and above the convenience value. You can spend a lot on one of these miraculous devices if you’re so inclined, but you can also get one for a few hundred bucks. That’s because the market for fridges is quite competitive—lots of different manufacturers, lots of different vendors—so at the less stylish end of the market, the sale price approximates the construction costs. And the construction costs are low, crazy low relative to what you’d be willing to pay to a refrigerator monopolist. If the cheapest fridge out there cost $5,000 I’d still want one and I bet you would too.

That wedge between what you actually pay and what you hypothetically would pay is the consumer surplus and it’s giant. That’s why establishing competitive markets is important. But this isn’t a new Internet-era phenomenon. And actually I think there’s a specific problem here with the Internet, namely that while competition between websites is incredibly robust, competition between Internet service providers is a joke. People sometimes look at the difficulty of charging people to read online news outlets and say that people “don’t want to pay for news.” But of course I do pay for my ability to read things on the Internet—I pay Comcast and I pay AT&T. After all, the consumer surplus of the home appliance revolution (fridges, toasters, radios, etc) was all built on the back of the giant consumer surplus associated with home electrification. But that surplus wasn’t brought to us by competitive markets, it was brought to us largely by public investment and a regulated utility model of dealing with “natural monopoly.” Absent effective regulation, a much larger share of the refrigerator surplus would have ended up in the pockets of the utilities.

On some level, I think everyone kinda knows this (certainly everyone hates AT&T) but Americans tend to be too parochial to recognize quite how badly we have it in this regard. Read, for example, Horace Dedieu on the American wireless Galapagos syndrome.

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