Virgin & NTL

NTL and Virgin are holding talks over a planned merger. Telephone services were once supplied by just one firm, British Telecom, but deregulation led to a more competitive market. If those firms then merge, once more creating a market structure of fewer competitors, are we left back where we started?

NO! Because outcomes that follow competitive practice are fundamentally different to those that arise from political decision making, and you shouldn't let apparant similarities fool you.

Transaction costs (the cost of using an open market) mean firms can benefit from expanding, but management costs (the cost of organization and knowledge discovary) means that firms can benefit from outsourcing. There's pressure to get bigger, and pressure to get smaller. How do we know which direction to move? Well "we" don't really, but if firms make decisions with the threat of competition we can be confident that the tendency is toward the right answer.

Most economists define "competition" as concentration i.e. a market with 1 firm makes that firm a monopoly, whereas a market with many firms is competitive. A process theory (rather than a static theory) defines competition as contestability which means regardless of the number of firms, as long as potential competitors could enter the market, the economic forces that weed out inefficiency are present.

So even if it looks as though we're back where we started, there's two crucial differences. Firstly, the market is still competitive, (despite there being fewer firms) because it's contestable. Secondly, the present outcome is the result of a process of entrepreneurial discovery, and that process produces knowledge otherwise unobtainable.

Also, see Chris Dillow.

Comments

[Matthew Whitfield]

Also, NTL and Virgin Mobile currently operate in different markets - mobile and home telecoms. So, by merging, they're not reducing competition at all.

[Andrew Mellor]

Maybe I've been reading too many socialist skits, but isn't the key problem to do with organisations whose first priority is to make money for shareholders, rather than create a quality service for the people?

[AJE]

I don't think those two things are conflicting - the former depends on the latter