Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Thursday, April 07, 2005

Monopoly, Entry, and Technological Change

When there appears to be a monopoly in a particular industry, the profits act as an incentive, inducing others to try to enter the industry. The negative effects of the monopoly are relatively short-lived because competition eventually drives prices down. Furthermore, technological change is often stimulated because of monopoly: people work pretty hard to figure out a way around the monopoly. All-in-all, the long-run effects of monopoly are not nearly so bad as they seem in the short run.

One of the best examples is telephone service.

In many developing countries, gubmnts maintained tight monopoly control over the land-line telephone service. Prices were high, installation charges were astronomical (with up to two-year waits in some countries), and service was downright horrible. But with the technological development of cellular phones, many of these countries were ripe for change. Growth in telephone service was astronomical, but it was mostly cellular-based. People who never imagined having telephone service ten years ago, now gleefully carry cell phones. Essentially, gubmnt monopolies in telephone service were eroded by the technological developments in cellular telephones.

Not quite so in Lebanon [thanks to The Emirates Economist for this link to the Lebanese Political Journal]:

Due to the government's failure to provide reliable fixed-line services, the LibanCell-Cellis "duopoly" made a killing over the next eight years. In a country of just 3.5 million people, nearly 800,000 have cell phones today (over 22% of the population, compared to 2% in Egypt). The government, which controls pricing, allowed the two companies to set subscription fees that were nothing short of highway robbery. Whereas mobile telephone calls cost around 3-8 cents per minute in other Arab countries, in Lebanon the cost was 13 cents per minute for dedicated lines and 35 cents per minute for pre-paid phone cards....

There's much more there, and be sure to read the comments, which add considerable additional insight.

My question:

Is cellular service in Egypt that much worse than in Lebanon, or is land-line service that much better? or are there other reasons for such large differences in cell-phone penetration rates in the two countries?

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