No, You Don’t Want A Monopoly

Russ Nelson argues that monopolies without government license (aka, “natural monopolies,” as the early monopoly literature called them) are a good thing.  Actually, I agree with his assessment, with one important caveat:  we have to be talking about contestable markets.  I have an older post which discusses the idea of contestable markets (among other things), so check that out for a refresher.  The short of it is that a contestable market is one in which there are low barriers to entry or exit.  That second part is very important, as entrepreneurs are like vultures (or, if you prefer, majestic bald eagles):  they swoop in and fly off with profits, but if they can’t fly off, they won’t swoop in.

Anyhow, for contestable markets, even if only one firm is presently in existence, you still see the same prices as in competition, and no monopoly profits.  However, if a market is not entirely contestable, you can still see monopoly profits.  For example, the mining of certain extremely rare precious metals (think, say, molybdenum) can lead to a monopoly situation, simply because there are so few deposits on the planet, and it is entirely possible for one firm to take over all of them.  Alternatively, certain monopolistic bottlenecks (see the previous post for a fuller depiction of these) can exist—examples in the literature generally focus around network infrastructures, such as airport runways and sky lanes, railroad tracks, highways, power lines, etc.  I would argue that most (if not all) of these are, in fact, more competitive than some of the practitioners of monopolistic bottleneck theory (particularly Professor Knieps) believe, but there is a legitimate economic question here, and in the event of a monopolistic bottleneck, you can have firms earning monopoly rents in a free market situation, simply because the barriers to entry are too high for competitors to come in and eat away those profits.

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