[opendtv] Re: Electric power as a natural monopoly

  • From: Craig Birkmaier <craig@xxxxxxxxxxxxx>
  • To: "opendtv@xxxxxxxxxxxxx" <opendtv@xxxxxxxxxxxxx>
  • Date: Fri, 14 Feb 2014 09:40:17 -0500

On Feb 13, 2014, at 9:01 PM, "Manfredi, Albert E" 
<albert.e.manfredi@xxxxxxxxxx> wrote:
> Dumping? Says who?

My bad. I used the wrong term. The correct terminology under section 2 of the 
Sherman Antitrust Act is predatory pricing. Dumping is effectively the same 
thing, but describes the actions of a foreign competitor, or government to 
undercut the pricing of domestic competitors.

Wiki says this about predatory pricing:

Predatory pricing (also undercutting) is a pricing strategy where a product or 
service is set at a very low price, intending to drive competitors out of the 
market, or create barriers to entry for potential new competitors. If 
competitors or potential competitors cannot sustain equal or lower prices 
without losing money, they go out of business or choose not to enter the 
business. The predatory merchant then has fewer competitors or is even a de 
facto monopoly.

There is much discussion about the validity of predatory pricing as it relates 
to anti-trust enforcement. Competitive pricing lies at the very root of 
capitalism, and price wars are not illegal per se. We all take advantage of 
"loss leaders," products sold below cost to get us into stores. The real test 
for a predatory pricing antitrust enforcement action is when a company drives 
out competitors to create a monopoly and THEN raises prices.

Certainly Amazon has been disruptive in the retail sector because it has 
demonstrated the ability to drastically reduce overhead relative to brick and 
mortar stores. There's nothing illegal about this!

The problems occur when predatory pricing is used to obtain a monopoly, which 
one can argue Amazon has done with e-books (I'm not saying they did or did 
not). What we can say with some degree of credibility, is that selling books 
below cost was a major factor in the demise of brick and mortar book stores. 
This was not limited to E-books, which eliminates the cost of printing and 
distribution; Amazon began by selling popular printed book below cost, before 
they helped to create the market for E-books. This is a major reason that the 
brick and mortar stores were crushed. The shift to downloadable E-books was the 
final nail in their coffin.

What Amazon did to the publishers, was a great cause for concern in the 
industry. Some of this probably needed to be disrupted, as the fundamental 
economics of publishing were disrupted by the Internet. Who is to say what the 
fair price of the hits that represent magazines, book, music and video/film 
should be? There is little if any incremental cost to sell ten million versus 
10,000 books; as volume increases, one can argue that profit margins should 

In this area Amazon is less than transparent. They may sell a popular title 
below cost to pull in new customers, while simultaneously raising prices on 
specialty titles to make up for loses in other areas. Nobody fully understands 
the pricing algorithms Amazon uses, however, there have been many complaints 
suggesting that now that Amazon has a monopoly position in the sales of both 
printed and E-books, they have significantly raised prices for less popular 

Apple entered a market that was in turmoil, with the publishers desperately 
looking for a way to set a floor under pricing to prevent Amazon from being 
their only customer; a customer with the power to dictate price. The agency 
model they proposed is used extensively in other industries, rather than the 
wholesale model that allowed Amazon to sell below cost. Moving to the agency 
model where the publisher sets the price and the seller gets a commission 
(typically 30%), does not stop the seller from giving up some or all of that 
30%, or even selling below cost. The Agency model is working, and has for many 
decades, in similar industries such as music and packaged media sales (TV shows 
and movies). And it has been very effective in the new App economy; last 
October Apple announced it had sold 1 Billion Apps, and paid developer more 
than $13 Billion.

Where Apple got into antitrust trouble was asking for a contract provision, 
that would allow them to match the price of any competitor that sold below 
their cost. They lost the first round against the government, but most legal 
analysts believe they have a good chance of winning the appeal because of bias 
on the part of the presiding judge, who essentially said - before the trial - 
that she believed Apple to be guilty.

But the real issue is why the case was brought in the first place. If anything 
, the government should have been looking at Amazon, not Apple. Ironically, the 
industry did move to the Agency model, and prices for consumers have come DOWN. 
Yet the states are suing Apple now to recover what they claim are price 
increases that the public suffered.

All of this was simply to point out that the government is now very active in 
picking winners and losers in what is supposed to be a competitive marketplace. 
And to point out that the politicians and regulators have no problem propping 
up industries that are considered friendly to their agendas.

> Not sure what you're referring to. But as you already know, I have a thing 
> about conflict of interests. If Apple was looking to create some walled 
> empire of hardware and content, I know that once upon a time even you would 
> have been vociferously opposed.

Apple was trying to restore competition in a market that had been disrupted and 
was now moving toward a monopoly seller. They had no intention of trying to 
wall up content, or trying to compete with Amazon on price. Apple is in 
business to make money. Amazon is in business to dominate markets and grow 
WITHOUT PROFITS. They are the perfect role model for the new American 
progressives, who consider profits to be the root of all evils.

You keep forgetting that Apple is just a store, not a walled garden. You have 
as much access to iTunes content on your PC as I do on a Mac or my iDevices. 
Yes Apple uses the App store to attract consumers to their hardware.  Amazon 
does exactly the same with the Kindle E-readers and their proprietary tablets; 
they even created a proprietary fork of Android. Google uses Android to drive 
customers to their search cash cow and Google Play.

My wife has a Kindle and an iPad and can seamlessly move between the two when 
reading books she buys from Amazon using the Kindle App on her iPad.

The only exclusivity that Apple offers in the iOS ecosystem is that their 
devices are considered best of class in quality of build, they are easy to use, 
and most developers create Apps first for iOS because that's where the money 

Yet even Apple, with all their money, and customers who spend far more than the 
masses who use PCs and Android devices, is powerless to tear down the walls of 
the real walled gardens operated by the media conglomerates. So now it looks 
like they must cut deals with the media conglomerates to offer walled garden 
content alongside the OTT service they wanted to create.


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