In a post at naked capitalism Yves Smith asks:
How do libertarians propose to respond to the power of large enterprises?
noting that large enterprises may enjoy economies of scale over smaller ones.
If you feel qualified to respond, feel free to do so over at Yves Smith’s place. I found the comment thread very dreary reading, largely consisting of authoritarians verbally beating up on imaginary libertarians. However, I don’t think I’m the target audience for the question.
It did bring to mind a slightly different question: is there really such a thing as a natural monopoly? I have my doubts. The examples given in the comments thread, e.g. telephone companies, telegraph companies, electric power companies, and the example frequently encountered (John D. Rockefeller’s Standard Oil) almost certainly aren’t.
It all starts with railroads. As a rule the railroads didn’t own the land over which their rails were laid. They had rights-of-way, easements, granted to them by state and local governments over public land and private land alike. That’s the very image of a state-created monopoly. Telegraph companies had an intimate relationship with the railroads. The telegraph wires frequently shared the easements with the railroad companies (or even used the rails themselves), the railroads hauled the equipment for the telegraph companies at preferred rates, and so on.
Standard Oil enjoyed a similar relationship with the railroads, see here and here. The lands that Standard Oil initially developed for oil were the same lands reached by the railroads. It’s hard to imagine Standard Oil growing to be the giant it became without the railroads. So, in a sense, ultimately Standard Oil, the archetype of the natural monopoly, was itself a creature of the state.
I think that’s the case with most monopolies. Can anyone give an example of a truly natural monopoly?
I suppose natural monoplies might exist in smaller markets. A landfill might have a monopoly in a medium-sized market due to high cost of entry, high cost of transportation to other markets, and relatively inelastic demand.
Of course, landfills are also a business that has helped promote regulations that make their monopolies untouchable, but I think the order was that the regulations came second.
BTW/ what to do about railroads? I think the government should take the land back. Right now, the governments wants to spend billions on railroad upgrades with the hope of promoting high speed rail, and the railroads are in the driver’s seat and bargaining to take the money without necessarily any benefit to passenger trains. I’m not sure it makes sense in this day and age for the land to be owned privately and the passenger trains to be owned publicly.
The classic example of a natural monopoly is the only Italian restaurant in a small town. In general, natural monopolies tend to be specialized products targetted at a small market that can barely sustain the minimum viable scale of a single firm.
You’ll also see natural near-monopolies in industries with a strong network effect. For example, Microsoft Windows’s market position is largely due to the market picking a standard for a category of products which become more useful the more popular they are because of compatibility issues. The “near” in near-monopoly here, however, is important. Despite network issues, there’s still room for competitors to carve themselves out viable niches to offer a speciality product that serves a few percent of the market better than Windows would.
It’s hard for me to think of a product protected by copyright, a government-granted monopoly, as a natural monopoly.
What about Ticketmaster?
Okay, eBay, then. Same issues — buyers have a strong incentive to go to eBay because there’s more sellers there, and sellers have a strong incentive to go to eBay because there’s more buyers there. Even if eBay had no IP protections for their software and infrastructure so anyone who could afford the servers and support staff could clone eBay except for the user base, eBay would still dominate the online auction market.
Small market, rare commodities that come from limited geographic areas. Historically, new tech was often monopolized. Some steels, cannon production technology, etc. Harder to do now.
I think that you should also distinguish between local monopolies and national monopolies. A given area may have not had enough business to merit two railroads, so a local monopoly would occur with or without government intervention.
Along that line, I suspect that the rural hospital functions effectively as a monopoly in many ways. They would do so with or without government.
Steve
Rural hospitals? Monopolies, yes. Natural monopolies, no. For most rural hospitals two-thirds of their revenue comes from Medicare and Medicaid. Most of them wouldn’t exist at all without subsidies.
Mmm, they did exist before Medicare/Medicaid. How did they get along then?
Corollary- Has there ever been a monopoly of near monopoly that has not used its position to influence government?
Steve
Prior to 1946 rural hospitals that were more than a few beds in a building adjacent to a physician’s home were practically unknown. Since 1946 nearly all rural hospitals were either built with Hill-Burton money or were built after the enactment of Medicare and Medicaid.
There’s an interesting article on rural hospitals here. Unfortunately, its tables have been stripped so it’s a mite shy on data.
Don’t forget the mother of all monopolies, the East India Company – awarded its original trade charter by Queen Elizabeth herself.
Sigh
Rockefeller’s Standard Oil was not a monopoly. Standard never had 100% of the market. Standard typically did not raise the price of oil, but usually lowered it. Standard was not a stagnant firm, but typically an innovator early on. By the time Standard was broken up it had a considerably smaller market share than at its peak and would have likely gotten smaller over time.
Anyone who thinks Standard Oil was a monopoly needs to address all of the above. Failure to do so means Standard Oil was not a monopoly. It is just that simple.
No. The situation you are describing is monopolistic competition. After all there may very well be other restaurants, just not Italian. In other words, producers are selling differentiated products and while that gives them some market/price setting power it is not the same as a monopoly, save only in the short run.
What might help here are the definitions of what a natural monopoly are. A natural monopoly where a single firm can produce the entire market product for lower cost that two 0r more firms and there exists a price that allows the firm to recoup its costs and preclude competition.
Fail to meet these conditions indicates you do not have a natural monopoly. Note that the conditions above indicate two things:
1. Having a monopoly that sets it price at the level to recoup just its costs (i.e. not earning any economic profits) is socially optimal.
2. No entrant can enter into the market and claim a portion of the demand and earn enough revenue to cover its costs.
Point number 2 implies that barriers of entry are not what allows a natural monopoly to exist. In other words, the “natural course” of the market is to lead to a monopoly.
I know this may not fit will with all the clap trap most of you have been spoon fed in your history courses in high school about how evil Standard Oil was and that it is proof positive that a market economy can lead to monopoly.
Eric,
What you are describing are examples of network externalities. It is not clear that the first one in has to end up the winner or that the dominant player has to remain dominant. For example MySpace was one of the first to get into social networking sites, but it has been surpassed by Facebook.
The real problem is with vendor lock-in and I’d be willing to bet that the primary cause of vendor lock-in is…intellectual property laws. Microsoft is, as you point out, a case of vendor lock-in. However, I’d argue that the reason for this is because much of Microsoft’s code is protected via intellectual property laws. Opening up network standards would be one way of reducing lock-in.
I wonder if it maybe started before railroads. England put in place laws meant to encourage private ship building which were supposed to aid in defense, but also opened the way to much economic activity (including the monopolistic policies of the EIC.)