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We can classify monopolies into three categories: 1. Natural monopoly - Returns to scale are large enough (or the market it small enough) that one firm can pro
by elidourado 17y ago
We can classify monopolies into three categories:
1. Natural monopoly - Returns to scale are large enough (or the market it small enough) that one firm can provide the product for a lower price than multiple firms. This is possible without government backing, but is basically harmless if entry into the industry is not blocked. The natural monopoly may be the only seller, but it still faces potential competition.
2. Artificial monopoly - Firms merge to monopoly, firms form a cartel, etc., in an industry without returns to scale. This is the kind of monopoly that people worry about, but in a free market, they are (or would be) very uncommon. There is always an incentive to cheat on a cartel agreement, and there is always an incentive to enter the industry if profits are above normal.
3. Government monopoly - Firms take advantage of government-created (whether intentional or unintentional) entry barriers to establish an artificial monopoly, or the government itself establishes a monopoly in the activity. Very common. For instance, heavy regulation might favor large firms that can more easily absorb the fixed cost of compliance.
If you are interested in learning more about this, look into the branch of economics called "Industrial Organization." The best textbook is by Carlton and Perloff; it is the one I used when I taught IO this semester.
- ZeroGravitas 17y agoNatural Monoplies being 'harmless' is not standard economic theory. http://en.wikipedia.org/wiki/Natural_monopoly http://en.wikipedia.org/wiki/Natural_monopoly That wikipedia page goes to some lengths to accommodate the libertarian views (which I'm guessing you lean towards) while covering the standard view. A quick review of Industrial Organisation on Google Books seems to show it reflecting the standard themes on natural monopolies, that nationalization or regulation are the standard remedies and that neither are without problems. The more-mainstream free market argument is that no regulation of monopolies creates problems, but those problems are less than the problems created by nationalization or regulation. Pretending there is no problem with monopolies is a bit extreme for my tastes, though it seems to get mentioned a lot in the US at least.
- elidourado 17y agoI meant to imply what you call the "more mainstream free market argument," though I think it is now the standard view of people who study this stuff. The question is "harmless compared to what?" Conceivably, a regulatory environment in which all-knowing and benevolent bureaucrats costlessly implement and enforce regulation would outperform a laissez-faire approach to natural monopoly. But Hayek won the Nobel prize for showing that government is not all-knowing, and Buchanan won it for showing that it is not benevolent. It's not useful to judge natural monopoly against an alternative that does not and cannot exist. Compared to the relevant alternatives, natural monopoly is basically harmless.