Monopolies and competition.

Thomas Sowell, Milton Friedman, and F. A. Hayek all had at least something to say on the dangers of monopolies.  Monopolies which by their very nature exist with a lack of competition, allow the monopoly to charge higher prices than they could get away with in a competitive environment with the result that resources are used less efficiently than in a free market.

Friedman, in Capitalism and Freedom noted two basic types of monopoly.  One is a technical monopoly–one where there is some technical reason for one and only one company to provide a good or service.  An example, when Friedman was writing, was the telephone company (this was well before the AT&T divestiture).  In that case telephone service required an immense capital investment in a nationwide network of transmission lines and the feeds to each individual residence.  For another company to duplicate that would be prohibitive and having multiple feeds to go to the same end user was also impractical.

Those challenges have since changed driven at least in part by new technology which called for widespread replacement of infrastructure anyway (fiber optics, new electrical data cable standard, and so on).

And that’s one of the key things:  technical monopolies are generally temporary in nature as technology develops.

There are three ways to deal with the problems of technical monopolies (four if you count “enforced break up” which is usually costly for the very reasons that make it a technical monopoly):  a private monopoly operating on its own, a government operated monopoly, and a combined system of a private monopoly heavily regulated by the government. Friedman, who identified as a liberal in the 18th and 19th century sense (probably close to a Minarchist in today’s parlance since “liberal” has been thoroughly co-opted by various flavors of socialist in the public mind), called this a “choice of three evils.” Each of them have their own problems.  None of them wholly satisfactory to the free market capitalist (after all “monopoly” and “free market” don’t go together very well).  However, the question is which one is least troublesome.

Let’s take an earlier example.  Railroads.  In the 19th century there was a very strong monopoly element to railroads.  After all, the owners of the tracks could decide who could use them making it very much a technical monopoly at least regionally.  To control this monopoly the Interstate Commerce Commission was created.  Fast forward, motor cars and trucks start becoming big.  One of the principals of economics is substitution.  Things that are not the same can nevertheless be used for the same purpose.  Trucks, particularly long-haul freight, could serve as a substitute for rail.  Rail could be cheaper, especially for really heavy loads going a long way, but if the cost of rail increased too much, people could switch to trucks.  Railroads no longer had a technical monopoly on long distance freight shipments.

So, the Interstate Commerce Commission, created specifically to deal with the problems of railroad monopolies was disbanded as no longer needed, right?

If you believe that….

No, instead of being disbanded, in 1906 the Hepburn act increased the ICC’s authority adding bridges, terminals, ferries, and oil pipelines among other things.  In 1910 they added telephone, telegraph, and wireless.  In 1934 that last bit was taken from the ICC and given to the new Federal Communications Devision.  And in  1935 the ICC was given regulatory control over buses and motor freight carriers.

Eventually, the ICC was itself “divested”:  much of its power reduced and the what remained passed to different agencies.  Regulatory control over railroads given to the Federal Railroad Administration and motor carriers given to the Federal Motor Carrier Safety Administration within the Department of Transportation.

But even beyond its longevity far beyond the end of its original justification there’s the problem that the agency actually exacerbated the problem it was created to address.  Existing railroads were able to use the agency to restrict competitors.  And with the agency controlling prices, they could use it, in effect to set themselves up as a cartel with enforced price collusion (one of the things normally forbidden by anti-trust laws).

The monopoly was gone but the regulatory agency and its descendants remain.  This is not an isolated incident.  It is hard to see how the “monopoly” regulation (public safety is a separate matter) aspect in the end improved matters over just letting the monopoly operate on its own until technical advance creates new forms of competition.

The hammer of government, far from making the problem better, created new and long lasting difficulties.  And that leads us to the second form of monopoly, the monopoly created by barriers to entry.

The first thing to remember is that a lack of competitors is not the same as a lack of competition.  The ability of people to move into competition, even if they’re not currently there, is a check against the problems of monopoly.  It might take some time.  If you need large, expensive facilities to manufacture a particular good, then that’s not going to happen overnight.  On the other hand, both Apple and Microsoft started as essentially (or even literally) garage operations and ended up challenging the giant IBM.

Indeed, without the physical constraints to create a technical monopoly, the only way to create a monopoly is through imposed barriers to entry.  And that usually means the operation of government.

Take the example of Cable TV.  It was believed that Cable TV, at least locally, was a logical technical monopoly.  And so governments made deals with cable companies to, under proper regulation, provide cable as a local monopoly.

But as soon as those government imposed restrictions went away?  Well, I now have my choice of at least five services to my house that provide the same function as the one cable TV service I used to have–all at lower cost and broader service (including high speed internet).

So while “the threat of monopoly” is the great bugaboo that is often used to justify government intervention in the economy, the truth is, it’s more likely to cause the problem than to resolve it.

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