Download Topic 9: Deregulation, Liberalization and Privatization

Topic 9: Deregulation, Liberalization and Privatization
I. Overview
We have analyzed the conditions under which governments intervene into markets via
antitrust laws and regulation. We have discussed the rationales for this type of
intervention as well as different forms of intervention. This analysis is essential in order
to understand the structure of these markets and the strategies of firms operating in them.
Now we turn to circumstances that lead to the opposite tendency: the reduction or
removal of government intervention into markets through deregulation,
liberalization and privatization.
Markets tend to be deregulated/liberalized/privatized when the conditions underlying the
need for government intervention change. These changes most commonly involve:
(1) Increased actual or potential competition in the market because of changes in
technology or know-how
(2) Erosion of natural monopoly characteristics
(3) Opening to other markets via international trade
(4) Changes in political philosophies (communism, socialism, capitalism)
More specifically:
 Technological changes and market growth may alter the availability/commercial
viability of competitive alternatives that were not previously available (e.g.
availability of high speed internet access via telephone and cable lines).
 Advances in technology may alter the extent of economies of scale associated
with natural monopoly characteristics (e.g. the advent of gas-fired combustion
turbines in electricity and satellite transmission in telecommunications);
 market growth may push demand to a portion of the AC curve that is no longer
downward sloping over the range of output demanded (e.g. opening up of
international markets)
 The fall of the Berlin wall in 1989 and the resulting change in politics caused
many Eastern European countries to privatize many of their infrastructure
industries.
II. Examples of Deregulated and Privatized Markets
(see links to posted articles)
United States:
Long distance telephone (1984), further deregulation telecommunications (1996)
Airlines entry and prices (1978)
Railroads (1976-1980)
Stock market brokerage commissions (1975)
Trucking (initial deregulation in 1980, subsequent loosening of regulations re. hours and
training)
Cable TV (deregulated in 1987, reregulated in 1993, deregulated again in 1996)
Banking--inter-state (1994—permit banks to operate in other states)
Banking--(significant regulation in 1933 via Glass Steagal Act, Federal Deposit
Insurance Corporation, deregulation in the 1990s; reregulation July 2010 Dodd-Frank
Wall Street Reform and Consumer Protection Act.
Italy: from telecom to tomatoes.
Zambia: copper mines
Russia: oil, electricity, vast privatization effort after the fall of the Berlin wall.
Georgia: natural gas
UK: electricity
III. Case Study in Deregulation When Conditions Are Not Adequate:
US Cable Television Industry: Regulated, Deregulated, Reregulated, Deregulated!
Structure of the US Cable Television Industry: The US cable television industry
started off being structured as a regulated natural monopoly. Cable companies competed
through a bidding process for exclusive franchises to build and operate cable systems in
US cities and municipalities. Once awarded the franchise, the cable companies had the
obligation to provide reliable service to homes in the franchised area. Cable companies
generally provided 2 types of programming services: basic cable service and premium
services. Basic cable service delivered the television networks, local TV stations and,
sometimes, also included specialized programming such as ESPN, MTV and CNN. What
was included in the basic service often depended on how the franchise bidding process
was conducted. The price of basic service was regulated by the entity awarding the
franchise as well as state regulatory agencies. Premium Services included specialized
programming like the Disney Channel, the Food Network, HBO, Showtime and “payper-view” services. In order to get these services, cable customers had to first subscribe
to basic cable service. The prices for premium services were not regulated. Thus, cable
operators had a multi-part fee structure: a monthly fee for basic cable service and separate
additional fees depending on the level and amount of premium programming selected.
Cable Costs: The major costs of providing cable service are the capital costs associated
with building and installing cable television lines across the franchised area and
programming costs paid to owners of programming for the right to transmit such
programming over cable lines. The cost of network programming (a network
retransmission fee) is relatively low.
The cost of transmitting non network
premium/specialized programming is quite high and usually accounts for approximately
half of the monthly cable fee charged to customers for those services.
1984 Deregulation: In 1984, the FCC decided to deregulate basic cable television rates.
This decision was based on the view that the cable companies faced enough competition
from other means of receiving television programming (over the air, VCRs and the
expected growth of satellite) so that a lifting of price regulation would not result in their
taking advantage of the fact that they were monopoly providers of cable service. The
FCC also wanted to incentivize the cable companies to invest in their businesses. What
happened after deregulation was that the cable operators immediately raised basic cable
rates from very low levels under regulation to average prices of $35 per month. At the
same time, the industry began investing heavily in capital improvements to its cable
network, increasing channel capacity and consolidating (lots of mergers and
acquisitions). Profitability in the industry soared. Why did the cable companies increase
basic cable rates so dramatically immediately after they were permitted to do so?
Because the demand for basic cable is far less elastic than the demand for the premium
services (customers need to subscribe to the basic service in order to get premium
services and for customers who do no get good quality over the air reception, basic cable
service is necessary in order to see the programs.) Somehow, the FCC did not see this
coming. Cable customers began complaining loudly to the FCC about the rate increases
and also of poor service. The increased consolidation raised antitrust concerns.
1992 Reregulation: Congress intervened and required the FCC to reregulate the cable
television business. It also required the cable companies to refund one year of rate
increases to customers, limited increases in basic cable rates to 5% per year thereafter
(but allowed pass-through of increases in programming costs charged to the cable
companies by programmers) and required quality of service filings.
1998 Deregulation: In 1998, Congress and the FCC decided that the television market
environment was finally ready for cable television deregulation. The growth and promise
of satellite television (DirecTV was launched in 1996 and Dish Network/Echostar in
1998) and the advent of the internet as a means of getting news and information (e.g. the
weather) contributed to the sense that the cable television industry had less market power
absent regulation and could not indiscriminately increase its rates without driving its
customers to other alternative ways of receiving programming.
IV. The Financial Crisis: was it due to too much deregulation and liberalization of
the financial sector?
Discussion:
 Purpose of US banking regulations in 1933: the Glass Steagal Act and Federal
Deposit Insurance Corporation
 Liberalization of financial markets in the 1990s, commercial and investment bank
mergers, growth of hedge funds.
 Recent financial crises 1998, 2000, 2008
 Reregulation of financial markets, the Dodd-Frank Banking Reform Bill