Should we worry about monopolies

by Dr. Mike Walden, NCSU Professor of Economics, October 14, 2017.

One of my favorite games as a child was Monopoly. On a Saturday morning my mother would announce, “tonight is Monopoly night.” That evening the family would gather around the dining room table and play Monopoly for hours. An added bonus was the availability of snacks – something my mother usually prohibited after dinner.

Monopoly is a board game with the objective of controlling properties on the game’s four streets.  Players landing on your property have to pay a fee. The best situation is owning all the properties on a street, thereby almost guaranteeing all players will have to pay the owner fees as they round the board.

In economics monopoly is a form of market structure where one company controls all sales.  Buyers have no alternatives for buying the product or service. The monopoly company is therefore clearly in the driver’s seat.

Economists have several concerns about monopolies. Since they face no competition, monopolies tend to charge higher prices than if they had to worry about customers buying from someone else. As a result, monopolies make higher profits. Having a “lock” on buyers means monopolies may not be as sensitive to customer service as a competitive firm. This may cause monopolies to avoid improvements and investments that benefit consumers.

Monopolies were a big deal a century ago, but since then laws and regulations have been implemented to reduce or contain them. Yet today we’re seeing a revival of the issues over monopolies. At the national level there’s a claim that some large Internet-based companies may be close to achieving monopoly status in their markets. In North Carolina, a proposed partnership between the state’s two largest health care companies has raised questions about the power of the new mega-company and its impact on medical prices.

The Internet situation is interesting because it’s an evolving market. Part of what’s going on is something economists call the “network effect.” A network effect occurs when the value of a company to a user increases as more people use the same company. For example, postings on a social media site are more useful when more people access the site. The network effect therefore favors internet companies that are bigger, and the effect encourages the sites to become even larger.

Traditionally, there have been two remedies for monopolies - break the company into numerous smaller competing companies, or regulate the company. The first option was used with John D. Rockefeller’s oil monopoly one hundred years ago, and more recently the telephone monopoly (in the days of rotary phones) was split into competing “Baby Bell” firms The government also proposed – but never followed through on – splitting up Microsoft at the height of its dominance in the early 21st century.

Regulation of a monopoly means the government controls the prices the company charges as well as other key operational policies. Power generation companies, like natural gas and electric providers, are examples of regulated monopolies. The reason these monopolies are regulated rather than divided is because competition is thought to be impractical. Power generation companies require tremendous investments, and once those investments are made, the cost of adding customers is negligible. This means the first company to build a power plant in a region will be able to under-price any potential competitors.

Indeed, some have recommended regulating large Internet platforms like public utilities.  Similarly, one option for large health care companies is for greater public regulation of both prices and costs. Of course, government regulation has its critics. How would a government body know what the best price is and what appropriate costs are? Could regulation stifle innovation?    Also, some studies have shown that the regulated companies end up “capturing” the regulators, resulting in the regulators actually promoting policies that increase profits for the monopolies.

There is a third option for dealing with monopolies or near-monopolies. This is to do nothing, and instead rely on the development of new technology, products and services to erode the power of the monopolies. Clearly we have not seen the end of innovation in information technology.   While there are dominant Internet sites today for buying, searching and interacting, some new technology that we can’t even imagine today could make those sites obsolete in the future.

Likewise, many futurists predict how we use and receive healthcare could significantly change in the future, making care more individualized, less costly and bypassing large institutions.

After lying dormant for several decades, debates over monopolies are back. This is exciting to many economists, but for most people it’s a question of how we can have access to the best products and services at the lowest prices. This may be the most important economic question of them all, but you decide!

Walden is a William Neal Reynolds Distinguished Professor and Extension Economist in the Department of Agricultural and Resource Economics at North Carolina State University who teaches and writes on personal finance, economic outlook and public policy.