[betterunix2]

The problem with building new infrastructure is that the first company to do so will always benefit the most. It costs the same amount to lay fiber regardless of whether or not another company has laid the fiber. If you are the first to reach the town, you pick up all the customers. If you are second, you pick up only a fraction, despite spending the same amount to get there; in other words you will see a lower return on your investment.

Basically, what you have with ISPs is this:

https://en.wikipedia.org/wiki/Natural_monopoly

[waterhouse]

The first company to enter any market will always benefit the most. All industries have some fixed costs. And breaking into an existing market is always difficult for a new company. These things are not specific to this industry, yet there manages to be competition in other industries. Are the fixed costs really that high? Does that apply everywhere? I won't buy that without a strong argument, which would have to provide some numbers. I have an article that describes similar industries in which natural monopolies were claimed, yet successful competition existed in many places.

Can you provide any specific criticisms of arguments made in this article? It's a long one, so feel free to address just the "cable TV" or "telephone services" sections. I've reproduced three paragraphs of the section on cable TV below.

https://mises.org/library/myth-natural-monopoly

Cable television is also a franchise monopoly in most cities because of the theory of natural monopoly. But the monopoly in this industry is anything but "natural." Like electricity, there are dozens of cities in the United States where there are competing cable firms. "Direct competition … currently occurs in at least three dozen jurisdictions nationally."[1] ... The cause of monopoly in cable TV is government regulation, not economies of scale.

Also like the case of electric power, researchers have found that in those cities where there are competing cable companies prices are about 23 percent below those of monopolistic cable operators. Cablevision of Central Florida, for example, reduced its basic prices from $12.95 to $6.50 per month in "duopoly" areas in order to compete. When Telestat entered Riviera Beach, Florida, it offered 26 channels of basic service for $5.75, compared to Comcast's 12-channel offering for $8.40 per month. Comcast responded by upgrading its service and dropping its prices.[1] In Presque Isle, Maine, when the city government invited competition, the incumbent firm quickly upgraded its service from only 12 to 54 channels.[2]

In 1987 the Pacific West Cable Company sued the city of Sacramento, California on First Amendment grounds for blocking its entry into the cable market. A jury found that "the Sacramento cable market was not a natural monopoly and that the claim of natural monopoly was a sham used by defendants as a pretext for granting a single cable television franchise … to promote the making of cash payments and provision of 'in-kind' services … and to obtain increased campaign contribution."[3] The city was forced to adopt a competitive cable policy, the result of which was that the incumbent cable operator, Scripps Howard, dropped its monthly price from $14.50 to $10 to meet a competitor's price. The company also offered free installation and three months free service in every area where it had competition.

[1] Thomas Hazlett, "Duopolistic Competition in Cable Television: Implications for Public Policy," Yale Journal on Regulation, vol. 7 (1990). http://digitalcommons.law.yale.edu/cgi/viewcontent.cgi?artic...

[2] Thomas Hazlett, "Private Contracting versus Public Regulation as a Solution to the Natural Monopoly Problem," in Robert W. Poole, ed., Unnatural Monopolies: The Case for Deregulating Public Utilities (Lexington, Mass.: Lexington Books, 1985), p. 104.

[3] Pacific West Cable Co. v. City of Sacramento, 672 F. Supp. 1322, 13491340 (E.D. Cal. 1987), cited in Hazlett, "Duopolistic Competition."

[betterunix2]

"The first company to enter any market will always benefit the most"

That is true, but the effect depends on the cost of entering the market. There is a certain point at which the cost of entering the market is high enough that it will not be profitable to compete with incumbents, while remaining low enough that a monopoly will turn a profit.

For example, suppose a railroad must pay $100M/year to maintain tracks in a given region, and the region's customers will pay the railroad $101M/year for service (so the railroad makes $1M/year in profits). Assuming that all railroads have the same costs, it would never make sense for a second railroad to serve that market, because the only way to turn a profit is to capture the whole market. Also note that even if the railroad loses 50% of its customers, it will not see its maintenance costs reduced in proportion -- the railroad must also pay for the trunk line it uses to reach the market at all, as well as for things like the switches used for tracks leading to potential customers.

In fact, contrary to what the article suggests, there is a real example of the natural monopoly phenomenon in the history of railroads. Numerous railroads were built to serve the NYC metro region, but they only competed with each other near major urban centers (NYC, Newark, Philadelphia) and not at all in between. The Pennsylvania Railroad and the New York Central competed for traffic between NYC and Chicago, for example, but they did not actually compete for the many customers in the markets along their main lines, which were actually hundreds of miles apart. For the most part none of the railroads bothered to compete with incumbents further from urban centers, and instead used mergers to expand their businesses into "new" markets rather than overbuilding. The result was that their customers had no choice for first- and last-mile service; the only choice was in which line would carry goods between the first- and last-mile railroads. The railroads were willing to overbuild to gain very large customers, but not for the many smaller customers in less dense regions.

For reference, here is the 1918 map of Pennsylvania Railroad routes:

https://en.wikipedia.org/wiki/File:Pennsylvania_Railroad_sys...

And here is the New York Central:

https://en.wikipedia.org/wiki/File:New_York_Central_Railroad...

(You may notice a bit of a "hole" around northeastern Pennsylvania, around the Southern Tier of New York; that market was served by other regional railroads, but again, competition was limited to urban centers like New York City and Buffalo.)

That is probably the biggest issue I can see with the article: it focuses on service in urban centers or for very large customers (e.g. an aluminum plant in West Virginia), but there are numerous small towns that also need service. I was an undergrad in a small city in New York that had a small airport -- served by just one airline. There were just not enough customers in the entire region for any other airline to bother. Sure, in dense metropolitan regions there is plenty of room for overbuilding and for competition, but half the country lives in the flyover states. Again using the railroad example, one of the arguments for subsidizing Amtrak's Empire Builder route is that it provides service to a number of small towns that have no other options, not even bus companies.

One final point: The choice is not really between monopoly franchises and competing companies overbuilding; another option is to mandate infrastructure sharing to reduce the incumbent advantage. That approach has worked well for ISP service in a number of countries (formerly the United States); it works well for electricity in various places in America. Yet another option is to have the government build the infrastructure, and lease or otherwise allow private enterprises to use it, something which has worked well for roads since antiquity.