The Case for Monopoly

Keynes said he could see no reason why a government should become involved in owning a railway. However, the result of privatizing British Rail and trying to open it to competition, suggests Keynes may have been short-sighted. Monopoly might be a bad thing when exploited by some profit maximising economist, but the case against is by no means shown to be universally true.

The monopolist is likely to enjoy potentially lower costs than a supplier in a competitive market. As the sole producer, it could achieve both economies of scale in its operations and lower prices from its suppliers. These benefits could be passed on to customers. On the other hand, economic theorists argue, a monopolist lacks the competitive spur to perform, and may consequently permit costs to rise higher than in a competitive market.

The position is similarly ambiguous in terms of technological innovation, a measure of how an industry is progressing over time. On the one hand monopolists would be more likely to innovate than competitive firms, a) because their innovations are not going to be copied and the resulting profits competed away, and b) the profits retained from innovation are available to be invested in further R&D for further technology improvements. But again, the economic theorist argues that the monopolist would feel no pressure to innovate and would therefore be likely just to sit back and enjoy the extra profits it can make as monopolist.

It may seem surprising at first sight that the economist’s main arguments against monopoly, quoted above, are behavioural rather than technical, since objectivity is what they strive to achieve, with mathematical models of human behaviour which appear to remove subjectivity and doubt. But the economists’ ‘scientific’models are based on fundamental assumptions about human behaviour. We are not just out to maximise our own take, but also to minimise our own inputs; we are not just greedy but inveterately lazy as well It is on that basis that mainstream economists focus on the destruction of monopoly wherever it exists.

The non-behavioural, technical arguments advanced above appear to favour monopoly, at least as to its potential. The problem with monopoly is how to ensure that its potential benefits are realised for the greater good. The arguments may vary according to whether the case concerns what is sometimes referred to as a natural monopoly (eg gas, electricity, water etc), a monopoly granted by law, an industry which has developed towards a monopolistic position as it matured, or, as certainly happens from time to time,. a competitive market has been cornered and monopolised.

Empirical evaluation of monopoly in practice is limited, not the least because real monopoly is so rare. British experience of privatization has offered interesting cases of state owned monopoly industries being converted into privately owned pseudo-competitive industries. By pseudo-competitive is meant, not merely that the industry is not perfectly competitive, but that the attributes of competition have had to be artificially created. This creation, which has necessarily been accompanied not just by central government regulation, but targeting, monitoring and supervision, is a far cry from the free market ideal.

Empirical studies of these exercises have not so far demonstrated consumer welfare gains in the industries affected. So, despite what Keynes said, there may be a persuasive argument for monopoly, not just in railways, but in the public utilities at least. What is needed is competence in managing such operations.

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