99Percent

This OP is mostly in response to theyeti's here.

What is the definition of a natural monopoly? The theory states that when an enterprise requires high investment that produces a good or service at a very low cost, making new entries of competition difficult it would lead to a natural monopoly, and if there are more than one company supplying this good or service, prices would supposedly rise due to the inefficiency created, because of duplicate infrastructures, etc.

This in turn allows the government to grant franchises for companies who are willing to invest so that they are assured of a minimal profit by not allowing new competition. For example a city will allow only one company to supply the electrical network so it is assured that it can have a return of its expensive investment without fear of new competition. Usually this also leads to heavy regulation of the company because since it has no competition, a governmental watchdog must be maintained to be assured it doesn't abuse its position as a protected monopoly.

Personally I think all this natural monopoly theory is mostly a pretext for governments to intervene making perfectly free and efficient companies, wasteful, bureaucratic and slow to innovate.

But maybe all this idea of natural monopolies occuring is completely false. In previous times, it seemed like current technologies would be unbeatable and will stay forever. So the idea of new technologies replacing it seemed too farfetched, like the telephone or railroads. But nowadays, it is obvious that there is no practical limits on what technology can achieve, so with a little bit of imagination we can discard any current technology being monopolized "naturally".

There is also the "problem" of excessive duplication. It seems wasteful and inefficient for say competing utility companies to dig up two sets of holes in roads, set up two sets of poles for wires, etc, when only one company will eventually emerge by its lower prices and the secondary set of pipes, poles, etc will become wasted. But this can be solved if the communities involved set up sufficient high prices for the very valuable right to dig up holes and set up poles. This will avoid the problem of excessive duplication and wasteful pipes and poles that will become wasted or abandoned. It is no different from building two sets of competing high rise office buildings. The rent for the space must be sufficiently high in order for people contemplating such a venture take into account the risk and costs involved so the probability of ending up abandoning the building in the future is diminished.

Anyway, Thomas diLorenzo, wrote a very convincing chapter regarding the myth of natural monopolies. I hope someone here who still believes in that obsolete theory can counter some of his arguments. His concluding paragraph:

CoolBlueDude

Just remember that the only way a monopoly can exist is if coercion is used to isolate it from competition. A temporary monopoly can exist for a short time but if left open to competition than they will have to compete just like a regular business. The key figure is coercion.

seanie

Go buy an economics textbook.

A proper one.

(No. Looking at the Cato or Von Mises institutes websites don't count.)

You'll find that the problem of monopolies (natural or otherwise) and oligopolies is a well documented part of orthodox mainstream economics. The only disagrement you'll find is to their importance.

Because the whole study of economics is based upon simplified models of reality. And monopolies and oligopolies really screw up those simplistic certitudes. They complicate things horribly. Hence economists do their best to ignore the reality of "less-than-perfect" competition.

Fuck even Adam Smith recognised the phenomenon of monopolies.

Loren Pechtel

He's half right. At any level above the last mile there is no longer any need of monopolies. However, duplication of the infrastructure of that last mile is expensive and pretty much must raise prices above what they would be without such duplication.

Consider, for example, local telephone service. In theory there is competition. In practice, you're using the cable plant of the big guy no matter whose service you are paying for. It *IS* a monopoly. Using an alternative isn't a very good idea if you want quality service, either--whose wires get fixed first?

That doesn't mean you can't have competition. I would favor a system where the city is cut up into chunks of say 1 sq mile or even less depending on density. The various firms bid for service. The residents of the area vote on which offer they like better. Repeat every year.

seanie

I do apologise.

Vorkosigan

seanie, the thread can do without the excessive swearing.

Vorkosigan

99Percent

CoolBlueDude:Absolutely and the only real legal coercion that can exist in a democratic society like the U.S. is through the government! That is why natural monopolies are granted through the government locking out any possibility of free competition. Try offer new water or electric service to a small city and see what kind of response you get...

Loren Pechtel: The infrastructure on the last mile is expensive for a big company that would like to offer the service for say a whole city. What better opportunity for small companies to get in and compete on that last mile? But it is not possible because, yes, cities normally make this last mile a franchise monopoly!The competition you are referring to is for long distance who I think end up paying a fixed comission to the local telephone service. Anyway it is obvious nowadays that new technology in communications has made the idea that phone services are a "natural" monopoly practically ridiculous, if you consider cell phones, internet by cable, and other wireless alternatives.I don't think even that is required if you consider all the alternate forms of service that are available for each of the utilities as you can read in the linked article.

seanie: I don't plan to solve anything. It is suggested by economists that the problem of duplication can be solved by allowing communities to charge high enough price for the valuable road resource of digging and setting poles, etc instead of granting franchise monopolies which lock out any possibility of competition. Heck here in Mexico you aren't even allowed to produce your own electricity, much less offer to compete with the supremely inefficient state provider of electricity!False. It is the concept of non-intervention by the government, specially the higher level ones,like federal and state onew, that the whole concept of free markets depends on. If the free market develops certain monopolies, it should remain so, without any government intervention.Quite the contrary. The less competition there is consolidating all the production of a good and service in one company, the more efficiency is developed. The problem is that most of the times, production of such goods and services doesn't scale well, and many times an oligopoly (such as the car industry) is the one that works better.Almost right. Any individual in the market is influencing the value of the product. The objectively true value of a product is correct when there is no governmental influence in such a market.Thats the theory behind natural monopolies, but is obviously false. The whole argument is for the government to then grant franchise monopolies, but all that is clearly to the detriment of the end consumer because it locks out by governmental force any possible competition.

And yes, I agree with Vorkosigan, your excessive use of the word fuck (and incoherent paragraphing) detracts from a useful discussion.

theyeti

But there will always be a lag time between the formation of one natural monopoly and the technology that makes it obsolete. If technologies could be changed as quickly as prices, then there would be no problem.

Please note something very important: The existence of a natural monopoly in no way discourages the invention of a competing technology. Anyone can invent replacements for the sewer, electric grid, water works, road system, etc. at any time. The only difference with government regulation is that it keeps the price of the service set at cost or slightly above cost. And this makes a new, competing technology less attractive. But notice that this is only true because a private monopoly can keep prices artificially high. If the guy who owns the water works is charging 10 times what he needs to make a modest profit, it might encourage someone to try to find a new method of water delievery. The problem is that since the current water system is not being priced accurately, anyone who figured that he could undercut the water company would be sorely mistaken. If someone came up with a way to deliver water at half the price that the water company charges, they'd still be unable to compete because they're not comparing themselves to the actual cost of delivery. The water company is overpricing by a factor of 10. If the new guy tries to enter the market, the water company just cuts its prices to a factor of 3 (remeber, the new guy charges half the original price which is a factor of 5 higher than cost for the existing water company). The new guy quickly goes out of business, and the water company raises its prices right back up again. There's no way anyone's going to be able to penetrate that market until a technology is invented that delivers water at lower cost than the existing water company. But of course the incentive to invent such a thing exists regardless of government price controls.

This makes no sense to me. First of all, who is going to fix the prices on the real estate? The government? If you think it's okay for the government to fix the prices on the real esate, wouldn't it be easier just to fix the prices on electric transmission?

Secondly, how exactly does this solve anything? If it's too expensive for anyone to build an additional set of power lines, then you end up with only one set. And you still have a monopoly.

It appears that you got this notion from diLorenzo. I read what he wrote about this but it's totally senseless. Nowhere does he address the straight-forward and simple fact that duplicating infrastructure costs twice as much, and that the cost to service ratio will always be lower with a single producer. He does not address what to do when geographic limitations make it impossible for duplication; he just plays sematics with the word "monopoly" and claims that such a thing can never exist, therefore problem solved. As if the word itself was causing the trouble.

I skimmed the chapter, and I couldn't find anything that really qualified as an argument. There's some quote mining, some red herrings, unsubstantiated assertion, reliance on long dead authorities, a handful of anecdotes, and a pointless reference to Communism. (Oh, and he lauded California's electric deregulation!) Maybe you can take what you find to be his best argument and articulate it here.

theyeti

Loren Pechtel

Originally posted by 99Percent
What better opportunity for small companies to get in and compete on that last mile? But it is not possible because, yes, cities normally make this last mile a franchise monopoly!

Competing on that last mile means a *LOT* of duplicated stuff. It's the one area that I think makes sense to be monopoly.

The competition you are referring to is for long distance who I think end up paying a fixed comission to the local telephone service.

That's basically a scam: Before deregulation long distance was used to subsidize local calls. That's what that commission is.

Anyway it is obvious nowadays that new technology in communications has made the idea that phone services are a "natural" monopoly practically ridiculous, if you consider cell phones, internet by cable, and other wireless alternatives.

I have no problem with competition that doesn't involve duplicating that last miile of infrastructure.

99Percent

theyeti: True, but if a monopoly tended to abuse its position demanding higher prices and providing lower quality then it would propice the creation of new technology because it will make it more attractive to replace due to the larger profits involved. In fact successful long term companies know that and that is why they keep profits to a minimum despite lack of competition to precisely not invite new competition, like what occurred with one of the few true non-goverment franchise monopolies in the 20th century - Aluminum Company of America (Alcoa)And do you think this is a good thing? To stop progress and the developments of new technology? Also setting the prices artificially can lead to waste and inefficiencies. For example how many times have you seen advertisements and government propaganda urging consumers to save water and electricity who everybody ignores? It would be far simpler and efficient if companies simply were allowed to set up its own prices. If water resources began to be scarce then the price should go up and this in turn would make investments to provide for these utilities more attractive which in turn will lower the price, etc. Oh but no, the public wants to have its cake and eat it too.But if a company raises its prices at that rate, he won't have one newcomer but 10 newcomers competing because the investment is 10 times as attractive. Besides you must look at the demand side too. If people are charged that much they won't consume as much water. Taking a shower would be a luxury some might skip, or instead take a bath only once every 3 days with minimal use of water, etc, in effect reducing the overall profits of the water company that is overcharging.False, if the are government controls setting the price of a utility artificially low it leads to waste, and it shuts off any posibility of a new technologies.The prices can be bid upon on a limited availibility. And it would be the city governments (which compete with other cities for the services), not state or federal ones.No because the price is set before the first utility is built. In fact it occurred to me that we now have the sufficient technology to build roads with plenty of underground space to allow for several utilities to be in place that can then compete with each if they want to. But duplicating infrastructure is the same in any business that competes. It is twice as wasteful to have two similar stores offering the same products next to each other. They are wasting space for example, and there is no such thing as geographic limitations that make it impossible to duplicate an existing service, thats the whole point of the myth of natural monopolies.How about this:This is a pretty extraordinary claim that seems easy to disprove, but can you?

Loren Pechtel: And where 90% of the cost lies in providing for the service. Why would it be any different from any other business model, where the cost of a product or service is concentrated on a very specific line?