It fascinates me to see how flimsy (and widely accepted) the arguments for regulating “monopolies” are.
The story goes that there’s no way you could have two competing electric companies so the gov’t has to grant a franchise to one (a monopoly) and then regulate that monopoly. But the historical record shows that prior to the granting of franchises, multiple utility providers were common.
One thing I hadn’t realized is that as part of the regulation, the utility pays the gov’t a fee. Hmmm.
So the utility gets to charge higher rates. These are typically “cost plus”, which the regulators will tell you means that citizens only have to pay a smidgen over actual costs, thus profits are minimal. In practice “cost plus” means that the utility wants its costs to be higher so the “plus” is bigger. Thus, prices are higher than under a competitive situation. Therefore the utility is happy to kick back part of the higher profits to the gov’t (what do you want to bet that even the kickback amount falls into the company’s costs so there’s also a “plus” on the kickback?). Government-Industry partnership at its finest!
The paper I cite below isn’t the last word on the matter as others disagree, but you have to ask which is more likely;
- a) the flimsy story that everyone has heard and accepted uncritically: it’s impossible to have multiple providers and thus essential to have franchises and regulation (even though there are historical cases which defy said impossibility), or,
- b) some crony business people convinced some slimy politicians to share the higher profits available by blocking competition (as the English explicitly did under mercantilism) and this model was copied in other jurisdictions until it became the norm, perpetrating the flimsy story as cover.
Hmmm. Let me think on that a while…
More details at these links:
In 1880 there were three competing gas companies in Baltimore who fiercely competed with one another. They tried to merge and operate as a monopolist in 1888, but a new competitor foiled their plans: “Thomas Aha Edison introduced the electric light which threatened the existence of all gas companies.” From that point on there was competition between both gas and electric companies, all of which incurred heavy fixed costs which led to economies of scale. Nevertheless, no free-market or “natural” monopoly ever materialized.
When monopoly did appear, it was solely because of government intervention. For example, in 1890 a bill was introduced into the Maryland legislature that “called for an annual payment to the city from the Consolidated [Gas Company] of $10,000 a year and 3 percent of all dividends declared in return for the privilege of enjoying a 25-year monopoly. This is the now-familiar approach of government officials colluding with industry executives to establish a monopoly that will gouge the consumers, and then sharing the loot with the politicians in the form of franchise fees and taxes on monopoly revenues. This approach is especially pervasive today in the cable TV industry.
Creative destruction? Perhaps – but with a twist: the new businesses of the digital era aren’t stand-alone companies like stores or manufacturers but, as they say, entire platforms. This makes them capable of reconfiguring their whole sectors almost overnight. They aren’t just the operators – they are the environment.To become an entire environment, however, a platform must win a rather complete monopoly for its sector. Uber can’t leverage anything if it’s just one of several competing ride-sharing apps. That’s why the company must behave so aggressively.