ISP Market Changing market Structures and Competitive Forces in the Internet Service Provider (ISP) Industry

The Internet went from being practically unheard of in the 1980s and early 1990s to being accessible in most of the homes and even on the phones of many people in the developed world just twenty years later. During that period of time, the industry of providing this access to consumers, the Internet Service Provider or ISP industry, has gone through many significant market changes. As the ISP market and industry has changed structure, there have been practical and financial effects on consumers as well as on the ISP companies and other related businesses, and indeed it is hard to imagine an industry with more significant volatility in the past two decades. The following pages will explore this volatility -- both the specific market changes and their impact -- as a means of exploring the general principles and problems of market structure and the mechanisms by which they operate.

Patterns of Change in ISPs

The ISP industry has changed dramatically over its relatively short life span, with very few options and one clear market leader in the early days of a large and increasing consumer market, a proliferation of providers a decade in, and now a consistent move towards consolidation (Waterman & Choi, 2010). In many markets, there is a monopoly or near-monopoly of Internet service provision tied to cable television provision (Faulhaber, 2010; Waterman & Choi, 2010). This has had a significant impact on consumers and on ISP industry operators themselves.

Hypothetical Short- And Long-Run Behaviors

Some of the behaviors of ISP's and the ISP market are easy to predict given the similarities...

As the number of ISP choices available to consumer sin local markets and on a national basis decreases, it is expected that price will increase while service quality goes down. This will largely be because ISPs will engage in behaviors that focus on profit generation in a very direct fashion over the short-run, without a consideration for long-run customer retention or true competition as there will not be a true need for this with monopolies in many markets. Over the long-run, it is expected that competition will slowly increase and that government intervention and regulation will require these companies to modify their behavior in a more responsive manner (Altman et al., 2011).
Transaction Costs and Strategies

Infrastructure is a major transaction cost for the ISP industry, which is one of the reasons it has been co-opted by the already-present infrastructure of cable television and so closely follows a similar market model (Waterman & Choi, 2010). Providing and maintaining the physical resource to connect to consumers and also ends up creating a great deal of servicing and repair costs that represent another type of transaction costs. Finally, ISPs currently incur transaction costs resulting from their own inefficiency and complacency as a result of controlling monopolistic markets, creating more breakdowns in service provision, reduced revenue, and higher costs (Altman et al., 2011).

The transaction costs of infrastructure development and maintenance are tricky issues when it comes to Internet service provision, as once this infrastructure has been solidly in place for some time it cannot necessarily…