Natural monopolies? (1 Viewer)

[loquasagacious]

Is there such a thing as a natural monopoly and if there is should the Government own them?

 

[KFunk]

What about 'Yes, and the Government should own some of them"?

 

[loquasagacious]

What about 'Yes, and the Government should own some of them"?

Splitting hairs. Which should it own and why?

 

[jennyfromdabloc]

Maybe and No.

The whole idea of monopoly, natural or otherwise, is a bit of a joke. Whether a monopoly exists depends entirely on how broadly or narrowly you define an industry. Your local convenience store may have a monopoly on the supply of food in your neighborhood, but you would hardly think of it as a monopolist.

The myth we are taught is that if some greedy monopolist was take to over a vital "natural" monopoly like the electricity grid, they could extract massive prices and rip everyone off (hence the need for government ownership or regulation).

This analysis always ignores the presence of substitutes. Suppose a private, unregulated monopoly owned the entire power grid in Australia. Would they charge us all $500 a month (or something exorbitant) for our supply?

If they did, people would switch to substitutes. People would install solar panels, gas heating and buy petrol generators. Competitors may set up alternative power lines.

But this is so inefficient, right? Sure, but this would never happen in the first place. The mere threat of this happening is enough to keep the monopolist in check. Because once consumers switch to alternatives, even if the monopolist then lowers his price, he has lost all his customers. The risk to the monopolist is huge, because if he becomes to greedy he will loose almost all his customers and his multibillion dollar "monopoly" will become worthless.

Private "regulation" through contract law would also play a role. People purchasing new homes, or signing leases would probably demand some sort of guaranteed access to things like electricity, water and roads at reasonable prices.

 

[loquasagacious]

There are plenty of sound frameworks which help to realistically define an industry (Porter's five forces for example) and therefore define whether or not a monopoly exists. Using your example the convenience store is not a monopoly because the industry it is in is retail small-goods and groceries - it doesn't have power over it's suppliers and it's customers can easily access competitors. In contrast the wholesale copper-line telecommunications industry in Australia is monopolised by Telstra.

You touch on a valid point which is that to extract monopoly rents the demand for a good or service must be inelastic (no substitutes) however a maxim of microeconomics is that all demand is elastic in the long-term because of innovation and structural change. While technically true the time involved in the innovation/structural change process may be so protracted that the monopolist can extra monopoly rents for a very considerable period of time. Oil, telecommunications infrastructure and the electricity grid are prime examples of this.

As for whether natural monopolies exist that comes down to the individual industry characteristics, chiefly barriers to entry. In some cases the barrier to entry may be so high that new businesses simply can not enter the industry, the most interesting permutation of this is where the cost of entry is at a level that only one business can make a return (therefore the first-mover/incumbent has a competitive advantage). Infrastructure is the best example of this because it is not cost-effective for two businesses to both serve infrastructure to one customer.

Commonly it is not feasible for two businesses to both build transport, telecommunications or energy infrastructure servicing the same consumer because the cost is too high. For example if the Government builds an NBN then no business would considered building a duplicate NBN because at a build cost of ~$40billion they will never make a return on investment. In these scenarios the first-mover/incumbent will be a natural monopoly.

I'm not sold either way but where a natural monopoly exists I'm relatively comfortable with the govt owning it. For example imo the wholesale arm of Telstra should not have been privatised.

 

[dieburndie]

I'm not sold either way but where a natural monopoly exists I'm relatively comfortable with the govt owning it. For example imo the wholesale arm of Telstra should not have been privatised.

That isn't a natural monopoly.

If it is more efficient/productive for telecommunications infrastructure to be owned and operated by the government, shouldn't this also be true for roads, water, energy production, public transport (trains at least) and every other relatively essential good or service subject to mass consumption?
Or is it a unique case? If so, why?

Initially, the infrastructure component of Telstra should not have been sold by the government, but once a level of sustainable competition had been established between companies leasing existing government resources, it should have been divided and gradually sold on the open market (potentially to multiple recipients in joint ventures similar to the G9 that applied to construct the original NBN).

What actually did occur was disastrous.

Edit: I just re-read your post, maybe you could better clarify this:

Commonly it is not feasible for two businesses to both build transport, telecommunications or energy infrastructure servicing the same consumer because the cost is too high. For example if the Government builds an NBN then no business would considered building a duplicate NBN because at a build cost of ~$40billion they will never make a return on investment. In these scenarios the first-mover/incumbent will be a natural monopoly.

Are you referring to the construction of this type of infrastructure in what is potentially a free market? I don't know why you have used an industry subject to the impact of an incredibly large and expensive government project, the presence of which immediately destroys any possibility of widespread competition developing. Government ownership of infrastructure is what seems to be the problem here, not privatisation.

Also, what are your thoughts on joint ventures as mentioned above? What is preventing competing companies voluntarily investing in combined infrastructure projects that are financially beneficial for all involved?

 

[S.H.O.D.A.N.]

I wouldn't want water, roads, jails, etc owned by private industry.

 

[jennyfromdabloc]

There are plenty of sound frameworks which help to realistically define an industry (Porter's five forces for example) and therefore define whether or not a monopoly exists.

Well you can define anything any way you want, which was very much my point. I was questioning whether exploitative monopolies able to extract large economic rents from consumers are likely to actually exist in the absence of government.

Using your example the convenience store is not a monopoly because the industry it is in is retail small-goods and groceries - it doesn't have power over it's suppliers and it's customers can easily access competitors. In contrast the wholesale copper-line telecommunications industry in Australia is monopolised by Telstra.

There are plenty of alternatives available to the copper wire system; mobile networks, radio, satellite communications. In parts of Europe entire cities are connected by wi-fi, and this technology is increasingly becoming cheaper. The technology needed to transmit data across power lines is also quite feasible.

You could argue the switch to alternatives is already underway to some extent. Many people don't even bother with fixed telephone lines and use their mobile phones exclusively because the plans are so cheap now. I know mobile towers interact with the copper wire networks, but rivals could build satellite communications or new under sea cables to communicate externally. Within Australia people could switch entirely to mobile to mobile voice calling communications, and/or to VOIP. Come to think of it there are so many alternatives to the copper wire system and they get cheaper and more numerous all the time.

You've also ignored the most important point, which is that none of this is ever likely to actually happen. It is the mere threat that consumers will switch to alternatives that keeps the monopolist in check. Remeber, once consumers have made the switch to alternatives, they have no incentive to go back to the monopolist's system, so his entire multibillion dollar investment is effectively rendered worthless. Do not underestimate how powerful this incentive is.

You touch on a valid point which is that to extract monopoly rents the demand for a good or service must be inelastic (no substitutes) however a maxim of microeconomics is that all demand is elastic in the long-term because of innovation and structural change. While technically true the time involved in the innovation/structural change process may be so protracted that the monopolist can extra monopoly rents for a very considerable period of time. Oil, telecommunications infrastructure and the electricity grid are prime examples of this.

You underestimate how quickly innovation and creative destruction will take place in an unregulated market. I've already provided some explanation of why monopoly power would be threatened very quickly if high rent seeking occurred in these industries. You didn't even bother to refute my example of how easily alternatives to the electricity grid could be implemented.

Would you care to back up your assertions?

Edit: All the monopolies you cite were created by the government in the first place. If this had not happened, it is much more likely that smaller firms would create interconnected networks, standardized and regulated using contract law, because it is extremely expensive and risky for one firm to build an entire nation wide network of something like roads, or power lines. This is exactly how the complex system of international underwater communication cables works today, more broadly speaking, it's how the internet works.

Yet if the internet had been created by a government monopoly, most people would probably find it hard to imagine how such a complex system could ever be coordinated without government involvement.

 

[aussie-boy]

Maybe and No.

The whole idea of monopoly, natural or otherwise, is a bit of a joke. Whether a monopoly exists depends entirely on how broadly or narrowly you define an industry. Your local convenience store may have a monopoly on the supply of food in your neighborhood, but you would hardly think of it as a monopolist.

The myth we are taught is that if some greedy monopolist was take to over a vital "natural" monopoly like the electricity grid, they could extract massive prices and rip everyone off (hence the need for government ownership or regulation).

This analysis always ignores the presence of substitutes. Suppose a private, unregulated monopoly owned the entire power grid in Australia. Would they charge us all $500 a month (or something exorbitant) for our supply?

If they did, people would switch to substitutes. People would install solar panels, gas heating and buy petrol generators. Competitors may set up alternative power lines.

But this is so inefficient, right? Sure, but this would never happen in the first place. The mere threat of this happening is enough to keep the monopolist in check. Because once consumers switch to alternatives, even if the monopolist then lowers his price, he has lost all his customers. The risk to the monopolist is huge, because if he becomes to greedy he will loose almost all his customers and his multibillion dollar "monopoly" will become worthless.

Private "regulation" through contract law would also play a role. People purchasing new homes, or signing leases would probably demand some sort of guaranteed access to things like electricity, water and roads at reasonable prices.

But the price differential between mass produced and privately produced electricity is huge. There is still huge scope to add an extremely generous profit margin without losing customers.