theyeti

Like I said already, it has nothing to do with profits, but with costs. No matter how large the profits are, a new technology will not be able to compete unless it reduces the costs involved. If it tries to compete, the owner of the current company will simply wage a price-war and drive it out of business, and then will raise the prices right back up again.

I don't know anything about Alcoa off-hand. Perhaps I will look it up later; I've learned the hard way not to believe anything that libertarians say about these things though. At any rate, I don't think that Alcoa would qualify as a natural monopoly, since anyone can mine and process aluminum as long as there's land available for mining.

Like I mentioned already, it does not discourage progress and new technologies. Anyone who invents a technology below cost of the current one can penetrate the market. Anyone who does not beatt the current costs cannot penetrate the market. The government merely regulates the price that consumers have to pay; it does not and cannot lower the cost of producing the service.

Yes it can, which is what's sometimes called a "lazy monopoly". Libertarians were not the first people to think of this you know. But there are ways around this, such as requiring different companies to bid for the right to run the serivce periodically. Whoever agrees to do it most efficiently gets the contract. Alternatively, the government can just own the service outright, like it does with the water works in most places. The government has an incentive to run it efficiently because the voters demand it.

Here's a newsflash: Privately owned electric companies have such advertisments too. Where I grew up, Duke Power seemed to be sponsoring dozens of TV shows single-handedly with such ads. Regardless of who's running the utility, there is an incentive for the producer to prevent consumer waste if it jepardizes the ability to meet demand. Just a small amount of demand in excess of supply forces the producer to invest heavily in additional output with little return. For example, power plants traditionally come in sizes of a few hundred megawatts or so. It only makes sense to build them this way because of economies of scale (maybe this will be a thing of the past when we rely more on wind power). If the electric company needs to build a 500 MW plant when it only needs 20MW of additional output, it's going to lose money. It's more cost effective to encourage conservation until a new plant absolutely must be built.

If there is only one water company, then it doesn't matter. They can set prices very high regardless of scarcity. No one's going to invest to build an entire new system of pipe lines because of the huge amount of capital this requires, and the fact that on average only 1/2 of their capacity will be sold assuming that they split the market with the current consumer.

Here's a hypothetical scenario: Let's assume that the current owner of the water works has X units of capacity which cost him 10$ per unit. Let's say that he opperates at 90% capacity and sells each unit for $30. (He's price gouging.) This gives him a profit of 20(.9)X, which equals $18 per unit sold. Now a competitor wants to get in on the action. He has to duplicate the entire infrastructure that the first proucer has for a given area. We'll assume that he also pays $10 per unit capacity, and that he also provides service for the entire area. Therefore, his capacity is also X.

What's going to happen? The original owner seeing that he has some competition will lower his prices. This seems like a good thing at first, right? He can go as low as $11.12 and still turn a profit, albeit a small one. But here's the catch. If the new producer enters the market, he'll have to take customers from the orignal one. Let's say they split the customers down the middle, so that each one is now opperating at 45% capacity. Now It requires each one to sell his water at $22.23 per unit in order to turn a profit, and if either tries to sell at $11.12, both will lose money. Notice that only when the sales are split exactly down the middle can they sell at the same price. Once one of them has a small advantage in the number of customers, this lets him lower prices because the amount of wasted capacity is lower, which in turn allows him to gain more customers, and you've got a positive feed-back loop. One of the two companies will always be driven out of business, and as soon as that happens (and it won't take long), we're right back to price gouging again. Since the company that was already established starts out with all of the customers, as is able to lower its price to the bare minimum right from the get-go, (and has been building up a war chest with its huge profits), the new one doesn't stand a chance. You'd be insane to try it. Note that in the above scenario, the consumer in the end gains nothing, and at least one of the producers wasted a massive amount of capital.

Note also that water scarcity, like electricity scarcity, is not based on production costs. It's simply based on capacity and on the weather. Raising the price of water during a drought might discourage use, but it wouldn't be compensating for the increased costs that the owner has to pay. The owner only pays more if he increases capacity, and even then it's not an increase in unit cost. Without competition, the owner has an incentive to keep prices high at all times, and to keep capacity as small as possible, even if this means an occasional disruption in service.

No it isn't. If you have 10 investors, the investment is 1/10 as attractive. No investor has an incentive to enter the market unless he can do it at substantially less cost.

The water company can simply set prices such that people will use enough water to maximize their profits. Given that running water is a basic necessity in the modern world, they're guaranteed a fixed level of demand. The problem here is that the price has no relation to the costs. Would you rather live somewhere where you can shower all day long because you're paying only 10% above costs, or somewhere where you never take a shower because you're paying 400% above costs? It's the consumer that gets screwed in an unregulated natural monopoly.

Nope, the government doesn't set the price below costs! Any new technology that beats out the current costs can enter the market. The government usually sets the price at costs plus a reasonalbe amount of profit. All it does is prevent the owner from price gouging. If a new technology comes along, it can simply be implemented along side of the current service, just like cell phones were. If the new technology is also a natural monopoly, then an enterprising company can work with the government to replace the existing service. For example, when it comes time to renew a contract for running a utility, someone with a new technology can out-bid the ones who want to run the existing service, as long as they're willing to pay the capital expenditures. Or the government decides that it will be cheaper in the long run, it can put up the capital itself.

It still makes no sense. It doesn't matter how cheap or expensive the land is; it still costs money to install a duplicate system of power lines, and there's simply no point to it.

The price of what? The price of the land? What does this have to do with the price of the infrastructure?

So you're going to dig up the roads anytime someone wants to add a new set of water pipes? Regardless, this fails to address the problem of wasted duplicate infrastructure.

But only with a natural monopoly is the ability to reach a customer based upon the amount of infrastructure created. A store can be scaled to any size and reach customers from anywhere. A sewage system only reaches a customer when a line is built to their house. That line serves only that customer and no one else. If each store had to be built separately for each customer, then we'd have the same problem with that too.

Nonsense. You tell me how to duplicate the Tennessee Valley Authority or the Hoover dam, and we'll talk.

I'll look into the history of it later when I have a chance. Part of the problem is that many natural monopolies have always been publicly owned, even in ancient times. Dilorenzo is offering up no theoretical arguments for why private ownership would be better. Nor is his claim anything to do with the fact that private ownership absent of regulation is problematic; he's only saying that there's no example of a "permanent" monopoly, which is not an extradordinary claim at all. What does something have to do to qualify as being permanent? Antitrust laws have been around for nearly 100 years now, only a slightly shorter period of time than most utilities (except water and sewer).

theyeti

godfry n. glad

theyeti did protest:

Or... The interstate freeway system. I'd like to know how that could be duplicated. Of course, it's a governmental responsibility because even the largest of private concerns can't meet the barriers to entry to be competitive.

godfry

99Percent

theyeti: Thats the whole point of the new technology, that it would be able to compete because it lowers the cost. And if the current private company is making already making minimal profit, then there is no harm done to the consumer. And this whole waging a price-war to cut off competitors is a very bad business practice and I think its fallacious. Can you give me examples where this actually happens, to the long term detriment of the consumers?Poisoning the well.Natural monopolies is a myth, remember? Alcoa was a real monopoly, driving out competitors due to its super efficient ways to produce aluminum and very low prices and marginal profits. But that was a good thing - the consumers benefitted and everyone won until the government sued it because of the whinning of others who wanted to get into the market. Alcoa had to artificially raise its prices to allow inefficient competitors to enter all to the detriment of the consumers!But as I said, if the price is artificially low then it could lead to waste, such as how we are currently wasting water and electricity (where it is regulated). Governments try vainly to cut this waste with propaganda urging everyone to conserve energy and water but obviously nobody really cares, individually. This shows that fixing the prices is not good because there will be times (like in droughts) where water is much more valuable, etc.This is false. A private company will always want to run more efficiently because there are profits involved. Voters may demand all the efficiency they desire but they cannot really see how it can be achieved, because they aren't individually running the company. Bureaucrats who are only earning a fixed salary can simply claim that the public company is already running at full eficiency, but how can this be known to be true if there is no posibility of anyone competing? Only when the price actually goes down because efficiency is achieved can a voter actually know that.Then its not really privately owned or free to charge the price it wants. Because if demand is higher it naturally follows that prices go up. In fact all company advertisements are designed to increase demand, urging customers to use more of its product and services. Your Duke Power example seems bogus. You can produce power on any scale if you are free to charge the right price for it.If the profit margin is high enough you are sure that people will find ways to compete, in different scales. And besides if the price is too high compared to other goods and services, consumers will find ways to save and consume less which will in the end hurt the company charching exorbitant prices.The new competitor does not need to duplicate the entire infrastructure. He can provide water in many ways, through truck pipes for example that will cut into the market depending on how much the current water provider is gauging. Another example a competitor might try to compete is to provide water recycling machines. The rest of your scenario fails.This doesn't make sense. As soon as someone is suspected of gauging its prices in any market investors will be attracted as bees to this market. The more the gauging the more investors will swarm to it.Every company tries to maximize their profits. There is no guarantee of a fixed level of demand. Demand can be extremely minimal in water if everyone uses it to its extreme necessety. And that price has no relation to cost is a false. There are many variable costs also. The more water is consumed, the more wear and tear of pipes is caused and more maintaince is needed. Water needs to be purified, and the more water is purified the more it costs to do so. If the demand for water dropped at extremely low levels because of exagerated price gauging, the infrastructure is wasted so are the water purification plants.Sure it does! Governments continually subsidize all the products and services they produce. Some are even free, like roads and parks! In franchise monopolies, governments regulate the prices so that it supposedly produces minimal profits, but that doesn't happen in many of the cases and most of the times it does lead to waste which can be disastrous in times of natural scarcity, because the franchise monopolies are not free to charge the price they consider healthy in the long run. Hundreds of franchise monopolies are continously bailed out by governments because of this all at the cost of the tax payer.But this happens in any enterprise that is in competition. Why then have two competing supermarkets competing againts each other in the same town, each having their own infrastructure of distribution that leads to waste?The price for the very valuable right to dig holes, set poles in the public roads, etc. Ideally, even the roads would be privately owned too, but governments of cities and small comunities could do it now (but not at the state or federal level).But there is no problem if its all in private hands. Let this waste, if you think there really is one, be paid by private individuals, no cost whatsoever to the tax payers.Multiple lines to each home can be built. In fact the home owner can own the line (first mile) that reaches to a more accessible place that has multiple connections. Besides that is not even addressing the possibility that these services can be satisfied without even having to have individual lines. A tank truck can serve a whole apartment for a week with one delivery for example. Electricity can be generated in home with generators or solar panels, etc. The truth is that there is no "natural" monopoly no matter how hard you try to justify it. There are always alternate solutions. Its all a matter of using your imagination and creativity. The Hoover dam generates electricity. This same electricity can be generated in countless of other ways. The hoover dam might generate electricity more efficiently but this can be compensated by extracting a huge price for the right to build one in the first place.

godfry n.glad:Again, modes of transportation compete against each other. If the interstate freeway system where privately owned and had to charge a toll everytime its used then it would compete fairly with trains, planes, etc. [quote]I'd like to know how that could be duplicated.[quote]It already is, most of it. But its public. There are many roads that lead to any one city for example.All the barriers to franchise monopolies or public companies are from the government. Even if you could find a way to make a profit which is difficult because most franchise monopolies operate at marginally above cost or even below cost, you are simply not allowed to compete with them by law.

Celsus

99Percent,

Do you know what sunk costs are?

Joel

Clutch

I'd love to reply to the argument. What is it?

Really. Summarize the argument with numbered premises and a conclusion. Because what it looks like to me is this: Governments are deregulating electricity markets. Many people have claimed that this is a natural monopoly. But that's just wrong.

No argument. Just an unwarranted assertion. (From a libertarian! Gasp!)

Or did you think that if something is a natural monopoly, then it should somehow be metaphysically impossible to privatize it?

Now, here's a question, though. These privatized electricity markets: did they provide safer, cleaner and cheaper power? Or did they press for rollbacks to environmental measures, enable speculation on energy markets, and engender power rationing and brownouts?

See, giving that information would be giving some actual facts. What you've cited is an empty screed. Why would you call it an argument?

Bill

I will agree with this definition. Remember this point: the natural monopoly involves a huge investment in infrastructure in order to deliver a product at a low price. In theory, then, the cost of allowing competition would destroy the low price, so it is better for the consumers if we not allow the competition to occur and instead force the business model to be that of a regulated utility.

The variable factor, then, is what would be the effect on the price of the end goods or services if competition were allowed. We need to keep our eye on this ball if we are going to have an intelligent discussion on this topic.

So, presuming that this is the case, we then elect to have the government dole out a franchise to a regulated monopoly instead of simply allowing competition to set prices. This is justified because the end cost to the consumer will be lower than if a competitive situation were allowed. That is what you go on to discuss: Now, let me raise a second point about not regulating monopolies. There is only a finite amount of "pole space" (I will call it "pole space" but it could be underground too) in any given city block. Picture what a typical city block would look like if there were three electric companies, three telephone companies, and three cable TV companies, all with their own rats nests of cables. You couldn't force them to go underground because that space was taken up with three water companies, three gas companies, and three sewer providers.

Its an ugly mess, isn't it? Of course it is, and people don't like ugly! In fact, in areas that pride themselves that they have beautiful neighborhoods, they want all utilities to be forced to be underground. Now, think about that rats nest of work, given just three competitors for each utility service.

It would be enough to give a headache to the city engineer responsible for allocating all of that mass of "public works" in the available "pole space." This thinking of yours is probably based upon inexperience and lack of thought on the subject.

I base my opinions on practical experience: in other words, I used to work for a start-up company that was stringing fiber optic cable around a small Iowa town in order to compete with the local cable TV company. I'm well aware of the issues when somebody tries to take on the local monopoly. And in this case, because of the technology we were using, we were not viewed as infringing on the monopoly because we were offering an exempt "Internet" service..... So, we plowed on, ignorant of the realities of the economics of the situation.

I should mention, in passing, that my job didn't last much more than a year because it became painfully obvious that there wasn't a good economic model to make this idea work. It really was a natural monopoly..... No, you can't.

Lets take a for instance. In theory, satellite television is supposed to compete with the local cable TV company. But of course, that was before the local cable TV company began to offer broadband internet, and possibly voice telephony over the exact same cable TV infrastructure, thereby freezing out the satellite TV vendors from the bulk of the market who wishes to buy simple packages of products (I have analog cable TV, digital cable TV, and broadband Internet all in one bundle from Cox).

So, technology has kept the satellite TV people serving primarily those markets where the cable TV companies would not serve in the first place, like farms, etc., and also serving "special needs" customers (if you want Majarishi TV, you need Dish Network, because that is the only company that the Majarishi has paid off to get his TV channel on the air).

And "over the air" services use up massive quantities of rather limited RF spectrum. Yes, you can put satellites on the same frequency band and space them out spatially at 2 degree intervals (or perhaps closer, if you are willing to invest in much larger antennas). But there is still a finite amount of space available. Unfortunately, as the satellite TV industry has proven, there isn't really enough market for dishes because the dishes do a poor job of "local customization." I can't get any of my Gainesville TV stations on a Dish Network dish.

So, the satellite dishes aren't really competing quite directly with the cable TV companies. The dishes have more channels, but they are not locally customizable; they are "one size fits all" for the nation as a whole. They fit the needs of some segment of the market, but can't directly compete with the local cable TV.

And when it comes to trying to hang cable on poles to compete with the local cable TV company, that too is not a cost effective model. You see, the way things work in the TV industry, the local cable TV operators get a very thin slice of the pie. The bulk of the bucks you send to your cable TV company are sent on to the content providers. And the price that you pay to the content providers is based upon the number of subscribers you have (a volume discount) and upon the original date you signed up (the earlier you signed, the lower is your "base price").

When we got done doing our pricing studies and economic models, we found out that we could not afford to offer cable TV over the fiber that we had laid. We were too late into the market (getting a higher "base price"), and, even if we signed up 80% of the people in the town (an impossible dream), we could not offer enough subscribers to get our PURCHASE COSTS down below the SELLING PRICE of our competition, which was AT&T's TCI division (at that time; its now been spun off to Comcast). We were faced with the problem of a negative margin for standard cable TV services.

Believe me: a cable TV company most certainly is a natural monopoly! If it were not regulated, consumers would pay a heck of a lot more for cable TV services; and in many communities, that would mean that larger and larger segments of the population would go without any service because it could not be offered by any competitor at any reasonable price. This is stupid!

All you are doing when you prescribe that "the communities involved set up sufficient high prices for the very valuable right to dig up holes and set up poles" is that you are regulating the industry's capacity by artificially increasing its costs. This is a form of regulation which is bound to have the end effect of costing the consumers more.

Remember: the objective of market regulation is to end up with the most efficient market producing the lowest possible price for the widest variety of products. That is what good markets produce. In a natural monopoly situation, you don't get to that end result by beginning with an exorbitant franchise fee for the right to do business in the first instance!

This is not only market regulation, but it is market regulation by the most destructive means possible! OK, I will now re-quote that paragraph to deal with it: In no case that he mentions has the natural monopoly been eliminated. Instead, in each case where the industry has been transformed in some way, the area of the natural monopoly has been somewhat redefined, but there is still a strong componant of natural monoply in place. Lets look at this on an industry-by-industry basis:

Electric Power: I know of no deregulation situation where people are actually getting some other company to run wires to their home or business. Maybe some big businesses can afford to do something like that, but certainly the average consumer can't. What has been done is that the natural monopoly has been redefined to be the local electric distribution network and the electric utilities have been split into production, long distance transport, and local distribution divisions. The local distribution division functions much like any city public utility with no generating capacity of its own: it simply buys power wholesale and sells it retail. If the individual consumer is allowed to choose a power provider, then all that does is affect how much power is purchased from each available wholesaler. The distribution company gets a fixed markup as a regulated natural monopoly. I personally think that this is a pretty stupid solution as it forces the distribution arm to promote market inefficiencies by continuing to purchase power from higher cost suppliers who have roped in the consumers with long-term deals. And if you model this mess on an economic basis, as an industry, it is horridly inefficient compared to the regulated public utility way of doing business. Costs have gone up across the board as part of this deregulation, and part of the reason is that consumers are paying for huge masses of accountants and clerks to keep all of the numbers straight. I judge electric deregulation to have been a total fiasco....

Cable TV:: The only way to have true competition with cable TV is if you have two cables. So-called "over-the-air" solutions don't have enough available bandwidth to be able to compete with traditional cables, and multiple cables are out of the question on a cost basis. Satellites really serve different market needs. Also, the margin in the cable TV industry is so low that it won't support the inefficiencies of competition. This is the most natural of a monopoly situation I've ever encountered, and if I hadn't of worked at trying to compete with it, I probably wouldn't have believed it. There is not now, and I don't feel that there ever will be, any real competition in the cable TV industry.

Telephone Services: The model here is exactly the same as for electric services. The industry was split into a "natural monopoly" segment of local companies and a "competitive" segment of long distance and "added services" vendors. All of the competitive companies have to go through the monopoly to gain access to the customers. I worked here, too (at Sprint). The long distance phone business is a mature market, and Sprint's revenue for long distance telephone services was trending downwards due to competitive pressures. The profits at Sprint came from the Local Telephone Division (the "natural monopoly" segments that Sprint owned). The cell phone division was growing rapidly and requiring cash investments over and above the cash generated from sales. So, LTD was Sprint's only bright spot at the time I was laid off (long distance underwent a "reduction in force"). In the beginning, there was only AT&T. In the end, there will be maybe three long distance companies that survive: AT&T, MCI, and Sprint. The ones that survive own their own national fiber optic infrastructure. Nobody else will have the wherewithall to survive. And the "last mile" will continue to be a regulated natural monopoly for the foreseeable future. Why? Because there still isn't any competing technology that can offer assured telephone service in a disaster. If your electricity is out, your local monopoly phone will work. Nothing else will.

Mail: This one is the most difficult for me to discuss because I have no experience in the issues of trying to compete with the regulated monopoly. But again, it focuses on access to and delivery for the so-called "last mile." The Post Office has kept its monopoly by claiming ownership of the right to mailboxes. If I presume, for the sake of this discussion, that this could be easily deregulated (by having competitive mail companies purchase sets of keys, or whatever), then we can talk about whether it would be efficient for such a competitive service to start up. And in general, it would not. Competition has only been viable in so-called "niche markets," like targeted mass mailings to customers in certain areas, etc. When it comes to general delivery of the mail, I can't think of any better or cheaper way of doing it than to rely on a regulated monopoly, for many of the reasons I've outlined above with the other utilities. The most expensive part of mail delivery is the labor cost to send a person out to deliver the mail. The economies of scale of having a single person do this as opposed to three people each delivering varying percentages of the mail seem obvious to me. It takes a finite amount of time to drive any given route, and it is grossly inefficient to have two or more people driving over that same route. We also have the issue of "under-served communities." The regulated monopoly is required to deliver mail everywhere. A competitor would not be; or else there would be no such competitor. If we relieved the current monopoly from the requirement to deliver mail everywhere, there would be places that would never receive mail because the mail volume would be too low to justify the labor cost of delivering it. As it sits, the monopoly can subsidize rural delivery (high cost) with cost efficiencies in the bigger cities. Competition would drive that away. Once again, I think that you have a situation with a natural monopoly that is perhaps over-defined. But I also think that competition has evolved into areas (like package delivery) where the natural monopoly was not doing that good of a job. And in fact, the USPS found it to be quite profitible to begin to offer overnight service in competition with the priviate vendor after the competitor developed and proved the market. So, it is a complex situation. But to me, mail delivery remains a natural monopoly for the sake of at least the inclusiveness of ensuring that everyone has mail service available to them.

==========

In summary, while I think that deregulation studies have shown some areas where competition could be allowed to occur naturally, it has also clearly demonstrated the wisdom of maintaining the "natural monopoly" concept for at least the "last mile" portion of each such service. I frankly feel that people who deny that "natural monopolies" are the best answer for these sorts of situations are allowing their politics to interfere with rational thought. In some situations, as described above, competition is flatly impossible at any cost! And in most "natural monopoly" situations, with the natural monopoly properly defined, the cost to the consumer can only go up if competition is allowed to flourish. (The electric utility debacle is the best example of how not to deregulate an industry.)

So, no, I disagree with you; rather strongly.

== Bill

Gawdawful

I probably shouldn't get into this, but here goes anyway. Forgive me if this rambles, I'm on night shift and I'm thinking it through as I type, which isn't that great sometimes.

I'm imagining a world where free market functions in every area of society including the delivery of "necessary" services. I live in the country, it is highly likely due to installation cost that I would have no electricity unless I put in high cost solar panels or generator or just happened to live near the transmission lines; I would have no water service at all except high cost delivery by truck, a water well of questionable quality and possibly high cost depending on area and the water table depth, or a cystern dependent on rainfall to fill; I would have no natural gas service and would have to heat with high cost heating oil, or propane, or maybe coal or wood if available, not to mention cable TV or the mail. Plus, the roads out here, if there were any, would be abysmal, much as they were prior to 1940, basically rutted tracks.

The infrastructure to supply these things to isolated communities and homes was too expensive and had to be spread to all consumers to have allowed rural America to advance into the future along with the cities. In 1920 only cities had utilities and telephones or paved roads; if one lived in the country you were out of luck. Were it not for government subsidized or wholly owned monopolies, electrical and telephone service would not exist; farmers and ranchers would have continued to live in relatively primitive conditions. Hell, I know areas in Southwest Colorado and Southeast Utah that didn't get phone service until the mid 1980s, but they've had electricity since the 1940s thanks to the REA.

Is it OK for people to form non-profit cooperatives such as the REAs or even in a city and compete for delivery of these services, or is that the same thing as a government run monopoly? I'm thinking of the commercial for profit banks in Utah that whined about the credit unions taking away all their business and then tried unsuccessfully to get taxes levied on the credit unions to level the playing field. Taxes on what? They make no profit and are not allowed to make a profit. Imagine the advantage a cooperative would have over a private company, no profit margin required. If economy of scale is required, cooperatives (sounds a little communistic doesn't it) could band together, a la Touchstone Energy.

On the other hand...

Regarding the water system example: If Company X had been providing service to the community using their system installed 30 years ago when systems could be installed for $2.50 a unit of capacity. Company Y is considering competing but cost is now $10 a unit, all Company X would have to do to keep such competition at bay is price their service right at $10 a unit and rise no faster than inflation. One would think the consumer wins anyway, right? Not 100% true, what they get is an antiquated system, possibly with lower quality service and product. OK, if it was bad enough, the customers might be willing to pay Company Y a couple bucks more for a newer better system. All Company X has to do is lower their price to a still profitable $5 a unit, then Company Y is going to realize that they probably can't compete and make a profit, they'd be better off trying to buy Company X out.

But...

Say Company Y goes ahead and builds the infrastructure required, the community of customers have to pay for two water systems, the newer of which is at much higher cost per unit due to inflation of construction costs. One might say this would be borne by the competing companies, but I say that for a company to remain profitable, the customers will be paying for it one way or another. That seems pretty inefficient to me and potentially higher cost. I also predict bankruptcy for Company Y's new system, Company X can spend $5 a unit for improvements and still be able to undercut Company Y.

So, I agree that free market competition would prevent price gouging even if it didn't necessarily mean you'd have an alternative choice; market pressure would supress the price.

As I think about it, I'm siding with the argument that some things like necessary utilities are indeed natural monopolies for efficiency's sake and for asthetic reasons. If you've ever seen photos of cities in the 1890s or 1900s, you will see electric and phone wires running all over the place, a real hodgepodge mess. That was free enterprise at its best, totally inefficient and ugly.


Warren in Oklahoma

js_africanus

IIRC, a natural monopoly is any firm with an average cost curve that is decreasing over the entire relevant range, e.g. the whole of production that the market is able to consume. To demonstrate that the concept is obsolete, I think that you need to demonstrate that, while in the past there were industries where firms had such average cost curves, such industries no longer exist.

The thing is, if the firms in question no longer had this sort of average cost curve, why would they continue to dominate the market? If a firm could move a letter from my house to the President for less than $0.37 and still make a profit, why wouldn't they go into business?

Bill

Now that you mention that, I do recall stories about Kansas City having two phone companies in 1900. Some people subscribed to one phone company and other people subscribed to the other phone company. In order to serve their market, businesses had to have telephones connected to both phone companies. That was inefficient for the businesses because why pay for connections to two companies when your call volume only needs one line? So, I think that the Chamber of Commerce got the two phone companies to merge or something like that. Whatever the answer was, by the time that Kansas City was integrated into the nationwide telephone network, it was served by AT&T just like most of the rest of the big cities.

== Bill

99Percent

Common now Clutch, you are being deliberately obtuse. Clearly he is being persuasive with solid arguments backed with evidence and history.What?If you are reffering to the California's supposed deregulation fiasco, let me remind you that was not deregulation at all. Its not my fault that you are so biased you fail to see the facts and worse, evade the argument completely.