Natural monopoly Essay

I believe that times change and as they, change rules and regulations must adapt to the times. Therefore, the treatment of the different industries must represent the different industries as they grow. I do not think the Telephone and Broadcast should never have or ever be considered a â€Å"Natural Monopoly†. The concept of natural monopoly presents a challenging public policy dilemma. On the one hand, a natural monopoly implies that efficiency in production would be better served if a single firm supplies the entire market. On the other hand, in the absence of any competition the monopoly holder will be tempted to exploit his natural monopoly power in order to maximize its profits. A â€Å"natural monopoly† is defined in economics as an industry where the fixed cost of the capital goods is so high that it is not profitable for a second firm to enter and compete. There is a â€Å"natural† reason for this industry being a monopoly, namely that the economies of scale require one, rather than several, firms. Small-scale ownership would be less efficient. Natural monopolies are typically utilities such as water, electricity, and natural gas. It would be very costly to build a second set of water and sewerage pipes in a city. Water and gas delivery service has a high fixed cost and a low variable cost. Electricity is now being deregulated, so the generators of electric power can now compete. But the infrastructure, the wires that carry the electricity, usually remain a natural monopoly, and the various companies send their electricity through the same grid. Cable as a â€Å"Natural Monopoly†. Nearly every community in the United States allows only a single cable company to operate within its borders. Since the Boulder decision [4] in which the U. S. Supreme Court held that municipalities might be subject to antitrust liability for anticompetitive acts, most cable franchises have been nominally nonexclusive but in fact do operate to preclude all competitors. The legal rationale for municipal regulation is that cable uses city-owned streets and rights-of-way; the economic rationale is the assumption that cable is a â€Å"natural monopoly. † The theory of natural monopoly holds that â€Å"because of structural conditions that exist in certain industries, competition between firms cannot endure; and whenever these conditions exist, it is inevitable that only one firm will survive. † Thus, regulation is necessary to dilute the ill-effects of the monopoly. [5] Those who assert that cable television is a natural monopoly focus on its economies of scale; that is, its large fixed costs whose duplication by multiple companies would be inefficient and wasteful. Thus, competitive entry into the market should be proscribed because it is bound to be destructive. The Competitive Reality I believe that times change and as they, change rules and regulations must adapt to the times. Therefore, the treatment of the different industries must represent the different industries as they grow. I do not think the Telephone and Broadcast should never have or ever be considered a â€Å"Natural Monopoly†. The concept of natural monopoly presents a challenging public policy dilemma. On the one hand, a natural monopoly implies that efficiency in production would be better served if a single firm supplies the entire market. On the other hand, in the absence of any competition the monopoly holder will be tempted to exploit his natural monopoly power in order to maximize its profits. A â€Å"natural monopoly† is defined in economics as an industry where the fixed cost of the capital goods is so high that it is not profitable for a second firm to enter and compete. There is a â€Å"natural† reason for this industry being a monopoly, namely that the economies of scale require one, rather than several, firms. Small-scale ownership would be less efficient. Natural monopolies are typically utilities such as water, electricity, and natural gas. It would be very costly to build a second set of water and sewerage pipes in a city. Water and gas delivery service has a high fixed cost and a low variable cost. Electricity is now being deregulated, so the generators of electric power can now compete. But the infrastructure, the wires that carry the electricity, usually remain a natural monopoly, and the various companies send their electricity through the same grid. Cable as a â€Å"Natural Monopoly† Nearly every community in the United States allows only a single cable company to operate within its borders. Since the Boulder decision [4] in which the U. S. Supreme Court held that municipalities might be subject to antitrust liability for anticompetitive acts, most cable franchises have been nominally nonexclusive but in fact do operate to preclude all competitors. The legal rationale for municipal regulation is that cable uses city-owned streets and rights-of-way; the economic rationale is the assumption that cable is a â€Å"natural monopoly. † The theory of natural monopoly holds that â€Å"because of structural conditions that exist in certain industries, competition between firms cannot endure; and whenever these conditions exist, it is inevitable that only one firm will survive. † Thus, regulation is necessary to dilute the ill-effects of the monopoly. [5] Those who assert that cable television is a natural monopoly focus on its economies of scale; that is, its large fixed costs whose duplication by multiple companies would be inefficient and wasteful. Thus, competitive entry into the market should be proscribed because it is bound to be destructive. The Competitive Reality 1. A skeptic hearing exhortations that cable television is a natural monopoly that should be locally regulated could have some questions at this point. First, if cable is a natural monopoly, why do we need to guarantee it with a franchise? Economists Bruce Owen and Peter Greenhalgh argue persuasively that given economies of scale, if a cable company â€Å"is responsive and efficient in its pricing and service quality then there will be little incentive for competitors to enter, and no need for an exclusionary franchise policy. â€Å"[9] Thus, if entry restrictions are necessary to arrest competition, the industry by definition is not a natural monopoly. 2. Second, if cable is a natural monopoly, is it necessarily a local monopoly? Some observers use the terms interchangeably, but there is no evidence that economic laws respect municipal boundaries. Given large fixed costs, does it make sense to award a local franchise to one company when another already has facilities in an adjacent community? Yet such â€Å"wasteful duplication,† as the natural monopoly proponents would call it, occurs frequently under the franchise system. Local franchises make no sense in a true natural monopoly setting. 3. These questions, however, go to the heart of natural monopoly theory itself, a doctrine that is under increasing attack. [10] In the face of crumbling conventional wisdom in this area, the burden should be on the natural monopoly proponents to demonstrate that competition is not possible, and further, that regulation is necessary. Such a demonstration will prove impossible in the cable context. Cable is both extremely competitive, facing both direct and indirect market challenges, and, in any event, is better left unregulated. For many decades, economic textbooks have held up the telecommunications industry as the ideal model of natural monopoly. A natural monopoly is said to exist when a single firm is able to control most, if not all, output and prices in a given market due to the enormous entry barriers and economies of scale associated with the industry. More specifically, a market is said to be naturally monopolistic when one firm can serve consumers at lower costs than two or more firms (Spulber 1995: 31). For example, telephone service traditionally has required laying an extensive cable network, constructing numerous calls switching stations, and creating a variety of support services, before service could actually be initiated. Obviously, with such high entry costs, new firms can find it difficult to gain a toehold in the industry. Those problems are compounded by the fact that once a single firm overcomes the initial costs, their average cost of doing business drops rapidly relative to newcomers. The telephone monopoly, however, has been anything but natural. Overlooked in the textbooks is the extent to which federal and state governmental actions throughout this century helped build the AT&T or â€Å"Bell system† monopoly. As Robert Crandall (1991: 41) noted, â€Å"Despite the popular belief that the telephone network is a natural monopoly, the AT&T monopoly survived until the 1980s not because of its naturalness but because of overt government policy. † I hope that the above facts help support my beliefs that these industries should not be considered Natural Monopolies. These companies just executed and had better site than other in the same industry had. Today ATT is just as strong as it ever was. References Benjamin, S. M. , Lichtman, D. G. , Shelanski, H. , & Weiser , P. (2006). FOUNDATIONS. In Telecommunications Law and Policy . (2nd ed. ). (pp. 437 – 469). Durham, NC : Carolina Academic Press. Foldvary, F. E. (1999). Natural Monopolies . The Progress Report. Retrieved January 9, 2012, from http://www. progress. org/fold74. htm Thierer , A. D. (1994). UNNATURAL MONOPOLY: CRITICAL MOMENTS IN THE DEVELOPMENT OF THE BELL SYSTEM MONOPOLY . 14(2).