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Tuesday, April 13, 2004

Schumpeter in Yellow Pages Markets
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The Wall Street Journal [registration required] reports today on increasing competition in the Yellow Pages market. Yellow Book in particular is putting the squeeze on traditionally high Bell profit margins.

This competition, of course, is great for consumers, especially small businesses who advertise in the directories. The story does not mention why margins in Yellow Pages are so high though. In Colorado, at least, the regulators required Qwest's to impute its Yellow Page revenues into local rates. In other words, high Yellow Page margins were (yet another!) source of cross-subsidy to reduce monthly residential rates. Furthermore, when Qwest divested its Yellow Page operation because it found itself, ahem, a little short of cash, it agreed to continue imputing (now non-existent Yellow Page revenue) into local rates. [I still regret I agreed to this regulatory capitulation by Qwest. During the directory sale, the Commission staff and consumer counsel insisted that imputation of revenue into local rates continue. Because of the need for haste in closing the transaction, I reluctantly agreed. However, here is actually an instance of anticompetitive retail pricing--call it predation ordered by the regulator. If only regulators could be held liable for violating the Sherman Act. Call John Windhausen, I've finally found predation, of a sort. But, wait, none of his members opposed this clearly anticompetitive practice anywhere in the Qwest region, so far as I know.]

Back to the story. Very good news that the Yellow Page market is subject to competition. When looking at the margins in this business, it was extremely puzzling why they remained so high for so long. The technology and costs for producing a directory has to have plummeted in the past decade. Network effects must count for the durability of these margins, but even these -- it appears from Yellow Book's success -- don't last long in a digital age.

posted by Ray Gifford @ 9:08 AM | General

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