Why are there monopolies?
So-- I started the year talking about the basics of how economists model choice, and have been engaged in talking about institutions that facilitate exchange, which makes for some of opportunities from which people choose.
I have been talking about markets, which are one institution facilitating exchange-- first perfectly competitive markets, then monopolistically competitive markets, oligopolies, and monopoly. And on Friday I talked about how a monopolist maximizing profits in the moment produces until its marginal cost of production equals its marginal revenue from selling the last unit produced. Which, since the monopolist lowers the price of all units in order to sell an additional one unit, is less than price. And how by leaving unsatisfied willingness to buy at a price higher than the marginal cost of production, this is socially inefficient.*
So why, you may ask, do we permit monopoly?
There are three basic answers.
The first is, to do a favor. If you have ever noticed "By appointment to Her Majesty the Queen" on a Cadbury chocolate, you have seen a vestige of monopoly by appointment. Coming out of the feudal system, as industry and industries expanded, the monarch could grant a monopoly right to produce and trade within a product category. And could be paid to make such a grant. Yay, crown revenues! And a grant of monopoly that was enforced gave the grantholder greater profits.
A second cause of monopoly is proprietary information that puts a firm at a competitive advantage. This could be a system or technology that dramatically lowers production cost or increases production quality, or a completely unique product or service. Without the information the monopolist has, other firms cannot compete. For now.
The third reason for the existence of monopoly is when a firm that is very large relative to the market has a competitive advantage based on scale of production. These are called natural monopolies, and I'll talk more about them this week.
* Oligopolists can also price high and produce low, but market dynamics make predicting their short-run profit-maximizing behavior more difficult.
---
the commonest cause of enduring monopoly is economies of scale that make very large-scale product far cheaper per unit of good or service output than production at smaller scale.
This most frequenty occurs with a very large outlay for plant and equipment (capital).
A class case is wired telephone service, which initially required enormous outlay to connect residences and businesses to hubs and hubs to hubs. In the United States, the Bell Telephone Company performed much of tis investment, and retained monopoly for decades.
Remember how property rights are defined and defended by the government [in many/most modern cases]?
The US government permitted Bell to exclude other companies from using the wire network it has created and maintained, and thus to avoid price competition in providing phone service. In exchange the US government regulated the prices Bell charged, imposed uniformity, and required Bell to wire and serve unprofitable rural areas.
Tis protection and regulation of Bell was aways intended for a finite time, to reimburse its massive investment costs, but not to perpetuate (even limited) monopoly profits forever.
Those old enough may remember the gradual deregulation and breakup of Bell into Baby Bells in the 1970s, and eventual requirement of allowing non-Bell use of Bell wiring in the 1970s and 1980s.
Even before wireless communication.
Facebook posts incorporated:
Reasons for monopolies to exist
Natural monopoly
I have been talking about markets, which are one institution facilitating exchange-- first perfectly competitive markets, then monopolistically competitive markets, oligopolies, and monopoly. And on Friday I talked about how a monopolist maximizing profits in the moment produces until its marginal cost of production equals its marginal revenue from selling the last unit produced. Which, since the monopolist lowers the price of all units in order to sell an additional one unit, is less than price. And how by leaving unsatisfied willingness to buy at a price higher than the marginal cost of production, this is socially inefficient.*
So why, you may ask, do we permit monopoly?
There are three basic answers.
The first is, to do a favor. If you have ever noticed "By appointment to Her Majesty the Queen" on a Cadbury chocolate, you have seen a vestige of monopoly by appointment. Coming out of the feudal system, as industry and industries expanded, the monarch could grant a monopoly right to produce and trade within a product category. And could be paid to make such a grant. Yay, crown revenues! And a grant of monopoly that was enforced gave the grantholder greater profits.
A second cause of monopoly is proprietary information that puts a firm at a competitive advantage. This could be a system or technology that dramatically lowers production cost or increases production quality, or a completely unique product or service. Without the information the monopolist has, other firms cannot compete. For now.
The third reason for the existence of monopoly is when a firm that is very large relative to the market has a competitive advantage based on scale of production. These are called natural monopolies, and I'll talk more about them this week.
* Oligopolists can also price high and produce low, but market dynamics make predicting their short-run profit-maximizing behavior more difficult.
---
the commonest cause of enduring monopoly is economies of scale that make very large-scale product far cheaper per unit of good or service output than production at smaller scale.
This most frequenty occurs with a very large outlay for plant and equipment (capital).
A class case is wired telephone service, which initially required enormous outlay to connect residences and businesses to hubs and hubs to hubs. In the United States, the Bell Telephone Company performed much of tis investment, and retained monopoly for decades.
Remember how property rights are defined and defended by the government [in many/most modern cases]?
The US government permitted Bell to exclude other companies from using the wire network it has created and maintained, and thus to avoid price competition in providing phone service. In exchange the US government regulated the prices Bell charged, imposed uniformity, and required Bell to wire and serve unprofitable rural areas.
Tis protection and regulation of Bell was aways intended for a finite time, to reimburse its massive investment costs, but not to perpetuate (even limited) monopoly profits forever.
Those old enough may remember the gradual deregulation and breakup of Bell into Baby Bells in the 1970s, and eventual requirement of allowing non-Bell use of Bell wiring in the 1970s and 1980s.
Even before wireless communication.
Facebook posts incorporated:
Reasons for monopolies to exist
Natural monopoly