Econ / Monopoly Question

[ojc02]

My econ professor talked about natural monopolies today (ie non-govt interference ones) and he drew this on the board...



He said this was the situation for the electric utilities back in the day. One company had 90% market share and their average cost was really low due to economies of scale. All potential competitors knew this and so they didn't try to compete.

I have heard a lot that natural monopolies never happen. Is there a good Austrian explanation for this?

[Brainwalter]

It may be the case that one firm can have lower costs than many due to economies of scale. There are two cases with these low costs:

-They will pass their low costs on to consumers. In this case the consumers are served best by having a monopoly and I don't see the problem.

-They will use their "monopoly" position to attempt to charge exorbitant prices, in which case a new firm can enter the market and compete, with costs higher than firm A's but consumer costs lower than A's

[TomCollins]

[ QUOTE ]
It may be the case that one firm can have lower costs than many due to economies of scale. There are two cases with these low costs:

-They will pass their low costs on to consumers. In this case the consumers are served best by having a monopoly and I don't see the problem.

-They will use their "monopoly" position to attempt to charge exorbitant prices, in which case a new firm can enter the market and compete, with costs higher than firm A's but consumer costs lower than A's

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Or case three that the firm charges just high enough prices that no one could undercut them.

[pvn]

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It may be the case that one firm can have lower costs than many due to economies of scale. There are two cases with these low costs:

-They will pass their low costs on to consumers. In this case the consumers are served best by having a monopoly and I don't see the problem.

-They will use their "monopoly" position to attempt to charge exorbitant prices, in which case a new firm can enter the market and compete, with costs higher than firm A's but consumer costs lower than A's

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Or case three that the firm charges just high enough prices that no one could undercut them.

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Which is still not a problem.

[TomCollins]

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It may be the case that one firm can have lower costs than many due to economies of scale. There are two cases with these low costs:

-They will pass their low costs on to consumers. In this case the consumers are served best by having a monopoly and I don't see the problem.

-They will use their "monopoly" position to attempt to charge exorbitant prices, in which case a new firm can enter the market and compete, with costs higher than firm A's but consumer costs lower than A's

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Or case three that the firm charges just high enough prices that no one could undercut them.

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Which is still not a problem.

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Never claimed it was.

[Felz]

How is a price higher than the second-best solution not a problem?

[Brainwalter]

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It may be the case that one firm can have lower costs than many due to economies of scale. There are two cases with these low costs:

-They will pass their low costs on to consumers. In this case the consumers are served best by having a monopoly and I don't see the problem.

-They will use their "monopoly" position to attempt to charge exorbitant prices, in which case a new firm can enter the market and compete, with costs higher than firm A's but consumer costs lower than A's

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Or case three that the firm charges just high enough prices that no one could undercut them.

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That's still in case 1, the customer is being served better by one monopolist than they could by several firms. (or exactly as well)

[Emperor]

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It may be the case that one firm can have lower costs than many due to economies of scale. There are two cases with these low costs:

-They will pass their low costs on to consumers. In this case the consumers are served best by having a monopoly and I don't see the problem.

-They will use their "monopoly" position to attempt to charge exorbitant prices, in which case a new firm can enter the market and compete, with costs higher than firm A's but consumer costs lower than A's

[/ QUOTE ]

Or case three that the firm charges just high enough prices that no one could undercut them.

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That's still in case 1, the customer is being served better by one monopolist than they could by several firms. (or exactly as well)

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While this may be possible, but not probable, what happens to the consumers' interest when the product or service could be replaced with a bigger, better, faster, more economical solution, that either does not get developed or does not get distributed because there is no entryinto the market for competitive product or service?

Efficiency of service to consumer makes no difference anyway. If the demand is inelastic, as is in most monopolies, then efficiency is irrelevant. The affected economy is zero sum. Example:

Electric company monopoly services every customer at $10/megawatthour. Average customer's income is $10/hr at his job.

Electric companies in a competitive market supply electricity at $11 to $13 per megawatt hr. However because the demand is inelastic, the consumers make sure that they earn enough money in this competitive environment to pay for electricty, so their wages are higher lets say, $12/hr. So the net affect is zero.

Downsides. Most monopolies are regulated by governments. Government bureacracies tend to stamp every dollar into a quarter before anything else happens. So monopolies are historically horribly inefficient.

In America, deregulating an industry has historically proven to save the consumer 66% of the original cost of the service!!!

[ojc02]

[ QUOTE ]
It may be the case that one firm can have lower costs than many due to economies of scale. There are two cases with these low costs:

-They will pass their low costs on to consumers. In this case the consumers are served best by having a monopoly and I don't see the problem.

-They will use their "monopoly" position to attempt to charge exorbitant prices, in which case a new firm can enter the market and compete, with costs higher than firm A's but consumer costs lower than A's

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But what if they charge the monopoly price and then as soon as a competitor enters they drop the price down to just below the average cost of the competitor (while still making a profit for them)? When they do this they are again taking advantage of their lower average cost due to the economy of scale.

Incidentally, I have no problem with monopolies existing (so long as they're not coercive) or charging whatever price they see fit. If they are competing that effectively then they deserve to be able to charge whatever price they like. Ultimately, if they set their price too high, their marginal profit will be negative and they'll lose out. I am not as concerned with the dead weight loss as many seem to be. It would just seem to fit the empirical data to say that natural monopolies are seriously unlikely and unstable.

[Felz]

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I am not as concerned with the dead weight loss as many seem to be. It would just seem to fit the empirical data to say that natural monopolies are seriously unlikely and unstable.

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There's no reason not to be concerned with dead weight loss in a theoretical world. For your contestable markets argument only truely exists in a theoretical world as well.

Now empirically that's another problem entirely.