For decades, it has been argued that certain goods are “natural monopolies,” which Investopedia describes as:
A type of monopoly that exists as a result of the high fixed or start-up costs of operating a business in a particular industry. …
The utilities industry is a good example of a natural monopoly. The costs of establishing a means to produce power and supply it to each household can be very large. This capital cost is a strong deterrent for possible competitors. Additionally, society can benefit from having natural monopolies because having multiple firms operating in such an industry is economically inefficient.
To “protect” the public, “natural monopolies” are regulated, usually at the state level. Those regulations often cover virtually every aspect of the utility business, including pricing. The purported purpose is to protect consumers. But is the concept of “natural monopolies” valid? Should government prohibit competition, award monopolies, and then regulate the companies that are allowed to exist? Does regulation benefit consumers? Before we answer these questions, let us briefly travel back in time to before the birth of the telephone industry.
During the second half of the nineteenth century, Western Union dominated the telegraph industry. At one time it owned ninety percent of the telegraph market. Yet, its rates dropped from an average of $1.09 per message to thirty cents per message. According to conventional theory, Western Union should have raised its rates, not decrease them more than sixty percent. What happened?
First, such dominance usually creates greater efficiencies, and therefore, lower prices. (See the history of Standard Oil for another example.) Second, because other men remained free to compete with Western Union, the company could not grow complacent. Western Union was immensely profitable, even at the lower rates, and those profits attracted competitors. Third, new technology—the telephone—began to replace the telegraph as the preferred method of communication. Again, because men were free, they could produce and offer new values, and consumers were free to embrace those values if they judged them worthy.
As with many young industries, one company quickly rose to dominance in the telephone industry—AT&T. Perhaps because it feared prosecution under the antitrust statutes, or perhaps because it desired guaranteed profits, AT&T agreed to government regulation in exchange for retaining its monopoly.
Telephone service has long been held to be a “natural monopoly.” We are told that the cost of planting poles, stringing wires, and building the necessary infrastructure would result in inefficiencies if multiple companies had to duplicate their efforts to service a particular area. Therefore, the argument goes, it makes economic sense to grant a company exclusive service rights to an area and then regulate that company. (Similar arguments are made regarding electricity, water, sanitation, and other “public goods.”)
In the 1980s this argument was exploded by the widespread implementation of cell phone technology. As was the case nearly a century before, technology changed the way that we communicate. Thirty years ago, who would have imagined that we would be surfing the Internet from a phone that we can carry with us anywhere? Who, other than Al Gore, would have even imagined the Internet as it is today?
The advocates of “natural monopolies” have a short-term mentality. They look at the way things are now, and cannot envision them being any different. They believe that government regulation will protect consumers and private companies will gouge consumers. But the history of Western Union (and Standard Oil and countless other companies) demonstrates otherwise. Further, with energy prices soaring, how well is government protecting you?
When men are free to innovate and act on their own judgment, they can and do find new ways to produce the values that we want and need. They compete to produce better, less expensive values. If this is true of telegraph and telephone service, why should we not believe that it is also true of water, roads, electricity, education, and everything else?