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If Americans value, say, TV more, than economics would predict that Americans would therefore pay more for it

And in a free market, the price signal that creates would incentivize other suppliers to start offering more, which would push the price down until it was roughly equal to the French rate. Why doesn't that step happen?

That's sorta true, but it's overly simplified. You're not considering price elasticity.

It would seem that the French are more sensitive to price changes than Americans. That is, as price increases in France, it's hitting a sharper decline in quantity demanded than would be observed in the American market.

I don't know what the actual numbers here are, just that this is micro-economic theory as I understand it.

But in any case, I disbelieve (at least in part) that telephone rates (I don't know about other services) are higher in the USA. I base this on my experience of having just bought two years of domestic service for well under $10/month, and with international calls being cheap to the point of negligible. Moreover, with skype and other services being free, the bottom falls out of any comparison.

Phone communication has been a broken industry for a decade. We have been fully capable of making the whole thing voip using network lines if we had non-crap internet in the first place. If like the topic said, we had fiber to the home, we would have a single internet bill plus some service to provide "rentals" like netflix for shows and movies and that is it. The false split 3 way package deals are already a broken market because they assume you can't get it all under just one of those.

The reason the French rates are so low is because they have competition. I couldn't start an ISP in my area if I wanted to because Verizon owns the phone lines and Comcast owns the cable lines. I would need to lay everything by hand, but even that I would consider not being much of a problem anymore - if you took every "town" of 3k+ in the country you could easily have local ISPs lay fiber channels and fiber to the home for everyone in each community and pay it off with $60 a month service considering the per foot cost of fiber cable is lower than the going rate of coaxial was back in the 70s when cable tv took off.

It is purely a fixed game. You can't introduce competition to the system so you can't make a prediction on the reactionary effects of American consumers because that isn't happening in the first place.

On the topic of phone rates, I paid $250 for a 2 year 5000 minutes prepaid tracfone. It is the best cellular rate I could get considering I infrequently call anyone via traditional means and not over some VOIP service.

Free Markets don't work like that. If you charge 100$ for a bottle of water and most people charge 2$ than you end up selling far fewer bottles of water. Only the fact that we don't have a free market for high speed internet has kept prices so high and service so low.

A "free market" concept in it's pure-bred form does not and cannot exist. You either have some form of government control, or you get a monopoly/duopoly/plutocracy situation that skews things around. This is exactly what's happening now with telcos in the US.

Time to crack the whip and restore sanity in these markets. The telcos have become a law unto themselves.

If you get monopolies, they are considered bad only when they become an obstruction to improvement and inventiveness, because if the prices ever rose enough to justify competition again someone could enter the market, assuming it was a market like on-line retail where you can't crowd out competitors from store shelves.

Internet is a terrible commodity, because so much of the cost of connectivity is wrapped up in laying lines and buying server farms than actually maintaining the infrastructure. And that is really what it is - there is a reason roads aren't private, and why no other animal ever evolved wheels. Some things are best done collectively, and I usually lean libertarian but infrastructure is something you can't effectively leave open to free markets or give to private monopolies, because they are so easy to take through monopolistic practices.

It's a question of barriers to entry. Restaurants have not formed a monopoly in any country in the last 1,000+ years. However, places like Disneyland or the Pentagon will often prevent open markets and create a small internal Monopoly on food.

As to cable and high speed internet / cable. Most locations prohibit completion, artificially limiting which company's can sell cable in a given area. They had a rather tough fight getting off the ground even for an incumbent like Verizon.

I agree. Perhaps the "free market" effect is considerably weaker here perhaps due to the popularity of subsidized phone plans which lock in consumers and hide the real costs. To make matters worse, wireless service cannot be compared with price per mb alone, as there is also a bandwidth quality/coverage factor to look at.

It is weaker for plainer reasons, in that the costs associated with phone, tv, and internet are lay cable once and then reap profits. The costs of maintaining the router farms and fiber lines are paltry compared to the costs of buying the servers and laying the fiber in the first place.

That is why the cartel of providers is as bad as it is in the US - most localities sold their phone and cable lines to private businesses so they never had to recoup the costs of laying lines, and thus no one can compete with them because they had an unfair advantage from the get-go, and they have their hands in the pockets of every local and state government to keep anyone else from even getting permits to try putting down fiber. Sonic and Google are two rare exceptions to that rule.

Prices are only partially dictated by the value that people attach to a product. In a competitive market, prices are dictated heavily be the inherent underlying cost. When a lot of businesses compete with each other, prices get driven down regardless of how much people valeu the stuff, until they hit a point where they can't go down any further.

The real problem with US telecommunications is that the market is not really competitive. We have four national cell carriers who appear to be pretty big on collusion, and most places only have one or two options for high-speed home internet access.

In a competitive market, prices are dictated heavily be the inherent underlying cost.

This is false. The relationship between cost and price is weak.

At the expensive end, prestige brands push prices of goods to the stratosphere (think women's handbags).

At the cheap end, it's still quite common for prices to decline below cost. For example, consider cell phones or video game consoles, and of course the old standby example, razors. Each of these products is sold below production costs, but by using lock-in, the vendor can recover the loss through sales of proprietary goods later (monthly fees; licenses in game sales; razor blades, respectively).

"In a competitive market, prices are dictated heavily be the inherent underlying cost."

"This is false. The relationship between cost and price is weak."

Actually, this is true and is a well-documented and understood microeconomic concept. The more competitive a market (i.e. more firms, lower barriers to entry etc.) the more cost will dictate price. In this particular example, the market is not perfectly competitive, but the firms competing, (Verizon, Etc.) are not making significant profit margins.

This is a pretty good explanation, but a little searching will provide other wording which can help better understand the concept. http://www.investopedia.com/exam-guide/cfa-level-1/microecon...

At least according to this paper, the razor and blades story is something of a myth http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1676444

(Though your basic point is still quite valid.)

Cell phones are not sold below cost. You can only get them at a "below cost" price when buying them with a contract which is typically worth $1500+. It's simply deferred payment, not selling below cost. The key here is that paying the additional money later on is not optional. They will charge you fees, hit your credit, send debt collectors after you, and could potentially sue you if you don't pay.

It's true for video game consoles, occasionally, but the consoles are not very useful without games, which they make plenty of money on. The overall average price paid by customers over the lifetime of their purchases is correlated fairly well with the cost of making the stuff. The same goes for razors, printers, and whatever else you care to find that follows this model.

In any case, these are the exception, not the rule. The price of things I normally buy, like food, clothes, gasoline, electricity, and yes, electronics, are strongly based on their costs.

Prestige brands can be sold well above cost precisely because luxury brands become less competitive. Cheap handbags are basically fungible, but luxury ones aren't. When people want an LuxuryCo handbag, they want that, not an equivalent knockoff brand.

When it comes to telecommunications, you can see this happen in competitive markets like hosting providers. The price you pay for a server is pretty strongly linked to the cost of running that server. Dialup ISPs followed the same curve, ultimately ending up with service that was basically free (often ad-supported) because it cost so little to provide, because dialup was a competitive market. Home broadband generally isn't in the US, resulting in prices which can substantially exceed the costs of running the service. In places with more competition, prices more closely match the costs.

To quote the All-Knowing Wikipedia:

"In perfect competition, any profit-maximizing producer faces a market price equal to its marginal cost (P=MC). This implies that a factor's price equals the factor's marginal revenue product."

http://en.wikipedia.org/wiki/Perfect_competition

Of course, you never get perfect competition in the real world, but that's just my point: to the extent that prices don't match costs, it's because competition isn't perfect. The less competitive a market, the less the correlation between prices and costs.

I agree completely about luxury/prestige brands. Your real argument here is about commodities, and designer stuff is intended to not be a commodity. But regarding those commodities...

(please interpret these questions as being investigative rather than argumentative; I see something compelling in your argument, but I'm not sure I completely buy it. I want to understand better)

I understand what you're saying about a market in which consumers would be willing to pay more. The higher prices are a flag waving, showing profit opportunity to other potential competitors. Those others will enter the market and force down prices until the profit margin to be had reaches a level lower than they'd be able to get if they invested their resources into a different market.

But I've got a vague thought in my mind that I can't quite work through, having to do with demand level (as opposed to actual quantity demanded). It seems to me that if the amount that consumers would like is huge, then the degree to which demand pulls on the equilibrium is much greater. Ordinarily, a supplier's production limit is how much they can get the consumers to purchase. But if demand is so great that consumers will buy everything that can be produced (due to input resource constraints, or long lead times in building production capacity or something), then producers can continue to sell at prices that are high relative to production costs.

Where's the hole in that logic? I see the potential for one in my caveat about input resource constraints: if there's a high-profit item whose production and sales are bounded only by resource availability, then presumably the producer will attempt to buy more of that resource, thereby raising its price. Thus, the underlying cost of production would rise to meet the price (rather than the price declining to meet the cost, as previously argued).

But what about the other barriers to entry, such as the time necessary to build a factory? The fact that a new factory must be built does not mean that the market's not free.

> But I've got a vague thought in my mind that I can't quite work through, having to do with demand level (as opposed to actual quantity demanded). It seems to me that if the amount that consumers would like is huge, then the degree to which demand pulls on the equilibrium is much greater. Ordinarily, a supplier's production limit is how much they can get the consumers to purchase. But if demand is so great that consumers will buy everything that can be produced (due to input resource constraints, or long lead times in building production capacity or something), then producers can continue to sell at prices that are high relative to production costs.

Markets are very very rarely perfect. Everything you have described above is a barrier to entry in the given market: it will make the market take longer to reach equilibrium, if the market ever reaches a natural equilibrium at all. Keep in mind though over time supply becomes elastic - if you're making a killing selling deodorant, you can bet that competitors will take notice and open up their own deodorant factories. Or you can expand your own production and make more profit.

> Where's the hole in that logic? I see the potential for one in my caveat about input resource constraints: if there's a high-profit item whose production and sales are bounded only by resource availability, then presumably the producer will attempt to buy more of that resource, thereby raising its price. Thus, the underlying cost of production would rise to meet the price (rather than the price declining to meet the cost, as previously argued).

"Resource availability" is a tricky thing. Generally as a resource becomes more valuable, more opportunities open up to produce it. See oil drilling: at first, the oil was under the ground in so much pressure that it would gush to the surface. People in Spindletop TX gathered oil by putting out buckets in the early days. Now we have to do seismic surveys use complex drilling techniques to get oil. What makes those techniques profitable? The current high price that oil commands.

This is why supply and demand are modeled as linear relationships. Cost of production generally increases per unit as more units are sold and the producer starts running out of ways to produce. Demand generally decreases as something becomes more expensive per unit.

However, both are more flexible (elastic) in the long run. Let's say you produce widgets and there's a sudden surge in demand. You can't expand your stock overnight. But you can open a new factory in a year increasing your supply. On the other side, if you are a consumer and gas prices double tomorrow, there's not much you can do immediately besides fill up your tank. But six months from now, you might set up a carpool or start biking to work.

All of the examples you give were studied in my microecon class (take a look at supply elasticity, which sounds like what you're describing here). If you'd like to learn more (and are in the position to do so) I'd highly recommend taking such a class.

Just what I was going to reply, except better.

I want to add that capital investments required to enter a market aren't usually an absolute requirement to produce the item at all, but just a requirement to be able to do so at a competitive price. You can almost always throw money at the problem and increase production, even if just marginally. For example, iPhone production is probably completely maxed out right now, but if for some reason it was worth a billion dollars to Apple to produce one unit beyond their current capacity, they could come up with a way to build an extra one that didn't involve spending months building a new factory first.