Have US markets become less free?

NYU economist Thomas Philippon has a new book (summarized here) out examining how a variety of goods have become more expensive in the US than in other countries at the same level of economic development.  Examples include airfares, cellphones, and internet access.  These goods were cheaper in the US than overseas twenty years ago, so what happened?

Philippon blames using monopoly power in the US and a growing commitment to free markets overseas.  The time needed to open a new business in France has shrunk from 53 days to 4.  Most US households face no more than two choices for internet service whereas consumers in France have five or more.  Philippon estimates that growing monopoly power in the US costs consumers roughly $300 a month.

On EpiPens

Ever since an unfortunate encounter with some smoked salmon imported from China, I have been buying EpiPens for 10 years.  Fortunately the state health plan has shielded me from the tremendous price increases that Mylan has been imposing, now up to $600 for a two-pack.

Most of the discussions in the mass media have been of the predictable shame-shame-on-you variety.   Scolding pharma is a good way to vent, but does it really get to the heart of the issue?  Wouldn't any company raise prices 600% if they could get away with it?  I do not normally pull items from other economics blogs, but this article from Slate Star Codex that is featured today on Marginal Revolution is both informative and (in parts) hilarious.

Here are the informative parts:
1) A number of companies have developed EpiPen substitutes but they keep getting rejected by the FDA.  In contract there are eight competing EpiPen-like products in the EU.
2) There is an approved substitute called Adrenaclick but most doctors are unaware of it and keep prescribing the EpiPen.
3) Mylan spends heavily on lobbying to keep things the way they are.

Here is the funny part:

Imagine that the government creates the Furniture and Desk Association, an agency which declares that only IKEA is allowed to sell chairs. IKEA responds by charging $300 per chair. Other companies try to sell stools or sofas, but get bogged down for years in litigation over whether these technically count as “chairs”. When a few of them win their court cases, the FDA shoots them down anyway for vague reasons it refuses to share, or because they haven’t done studies showing that their chairs will not break, or because the studies that showed their chairs will not break didn’t include a high enough number of morbidly obese people so we can’t be sure they won’t break. Finally, Target spends tens of millions of dollars on lawyers and gets the okay to compete with IKEA, but people can only get Target chairs if they have a note signed by a professional interior designer saying that their room needs a “comfort-producing seating implement” and which absolutely definitely does not mention “chairs” anywhere, because otherwise a child who was used to sitting on IKEA chairs might sit down on a Target chair the wrong way, get confused, fall off, and break her head.

How soon before we choose our own cable bundle?

The recent announcements by CBS and HBO to start selling content directly to consumers mark the beginning of the end for the bundling of cable TV stations.  Now consumers can choose between different tiers of programming but are locked into all channels within a tier.  Time Warner Cable in Cary NC has starter TV with 20+ channels (mostly local channels and CSPAN), standard TV with 70+ channels and preferred TV with 200+ channels.

The average person ends up paying for lots of channels that are never watched.  Cable cutters have moved to Hulu, Netflix and Amazon Prime.  These outlets provide plenty of content but they do not include (1) live sports and (2) the latest shows on premium channels.  This is now changing; it will not be long before the other major networks and premium channels match CBS and HBO.

The tough question: will buying the stations you want a la carte save you money?  This WSJ piece argues that the answer will be yes in a single person household where only a few channels get watched.  But in a multi-generational household with varying tastes, the old cable bundle may start to look pretty good.

Another key issue: households still need an internet connection to watch online content, even if they drop cable.  Is there enough competition between cable, DSL and satellite broadband services to keep internet subscription costs down?  If not, cable companies will raise their fees for internet service to make up for lost revenue from cable channels.

Finally, if cable cutting becomes widespread then expect many channels to vanish (will we be able to survive without VH1 Classic?) and others have to raise prices significantly to cover costs. ESPN collects about $5.50 from every cable customer, regardless of whether they ever watch it.  The unbundled version will create pain: either it will end up costing a lot more or college and professional sports may have to learn to get by on less revenue.

No more Saturday mail

Although it has a monopoly on mail delivery and mailbox use, USPS continues to lose money and has recently announced plans to stop Saturday delivery.  Some commentators, including WP's Katrina vanden Heuvel, have noted that USPS faces extraordinarily high pension costs because of a law requiring full funding of pension and health care benefits (a law that applies to no other government or corporate entity).  But the ultimate problem is that USPS must break even, despite falling revenues and labor costs that it can't/won't control. 

Cornell professor Rick Geddes wrote a piece for CNN.com that gets to the more fundamental issues facing USPS and some imaginative ways of dealing with them.  He suggests the following steps be taken:

• End the monopolies so that USPS has to face competition, which will make it lower costs and improve service.  All 27 EU members have already done this.  
• Create incentives for USPS to become a global competitor in the mail and package delivery market.  That would mean the ability to enter new lines of business and make strategic alliances.  

USPS has assets, including a nationwide network of post offices (that could sell other things besides stamps), trucks and sorting centers.  Some could be sold to generate funds for investments elsewhere. 

One final thought: it seems like most of the mail I get these days is catalogs and solicitations, that use a lot of paper and fuel as they make their way to my mailbox.  Is it possible that, given the full environmental costs, the postage on these items is too low?  Maybe we could get by on three days of delivery?

Time for a post office bailout?

The US Postal Service is scheduled to run out of money sometime early next year.  We all know this will not actually happen, because Congress will intervene before then.  But what can be done?  Thanks to the internet, the volume of mail has decreased by 22 percent over the last five years.  UPS and FedEx have taken away most of the USPS market share on parcels.  Labor contracts and political pressure make downsizing difficult.  So far USPS has adjusted by raising rates every year or two; it's a good bet that another rate increase is not too far away.  

Megan McArdle raises the fundamental issue here:

Congress has given the Post Office two incompatible mandates.  It is to make money like a business . . . but it is not to have any of the freedom that businesses have to, say, close branch offices, cut its delivery area, or change delivery schedules.

This is, to put it mildly, lunatic.

Congress will make it difficult to close post offices or reduce service.  Unions (and some Congresspersons) will make it difficult to lower costs to become competitive. 

Should there continue to be a government monopoly on first class mail?  I don't know about your first class mail, but most of mine consists of catalogs and solicitations.  FedEx, UPS and other services could step in and figure out a way to make a profit.  Why not give them the opportunity?