The Unnatural Death of Natural Monopoly

CHICAGO: The old concept in economics of "natural" monopoly refers to an industry where the technological advantages of large-scale production precludes efficient competition among smaller companies. The alleged superiority of bigness has been used in many, if not most, countries to justify government ownership of many industries because government monopolies are supposed to better look out for the public interest than private monopolies do. Although claims about natural monopoly continue to influence public policies and academic discussions, this concept has become largely irrelevant to the dynamic economies of the modern world.

The growth of global competition implies that even when large scale production is most efficient, companies in small nations are no longer restricted to the inefficiently small scale of their limited domestic market. They can increase production enormously by operating in several nations, as Chilean electric power companies have raised their profits and expanded production out of their small domestic market by operating in other Latin American countries.

A more important defect of the natural monopoly argument is its failure to recognize that new technologies often evolve over time that are efficient at much lower levels of output than older methods of production. For example, small natural gas turbine plants can now generate electricity at lower cost than more traditional and considerably larger coal plants. Cellular phones unencumbered by a wired grid are competing effectively with traditional wired telephone systems, especially in places, such as most of the postcommunist world, where government owned companies are grossly inefficient.

A crucial defect of government-run enterprises is that they usually slow down the introduction of these better technologies. Because such state-owned firms do not have incentives to make profits, they are insulated from competition. Moreover, they are exposed to political pressures to cater to unions, favored customers, and other groups. Indeed, despite their mandate to serve the public interest, they have often provided abysmal service to the average customer; in some countries, getting a phone installed has been very expensive, and yet takes months and sometimes years.