If there is anything more abhorrent than wife-beating and drug abuse, surely it must be monopoly. Monopoly is un-American: To the economist it represents the very state of original sin. To the courts it ranks with conspiracy. Monopoly promises economic waste, throttled production, obscene profits, and naked power (em all rolled into one. Consider what used to be called the "public utilities." In that sphere, regulated monopoly flourished for many years. Yet, with all its faults, we still feel a lingering nostalgia for the days of unabashed monopoly.
Unnatural, but Prized
The monopoly in question was once thought to be "natural" (em at some remove from the unspeakable category of "unnatural" monopolies. Of course, these regulated monopolies of yore were stodgy enterprises, mostly headed by lawyers and accountants and engineers, and a bit untutored about marketing. Until recently, the name of the local light company was pretty descriptive ("The Light Company"). Only in recent years has the electric company called itself "EnergiWhiz," or the phone company called itself "Surftech" or "TechnoTalk."
The consensus now proclaims that regulated, monopolies lacked the stimulus for innovation that seems to prod more entrepreneurial ventures. Where does this leave the Bell Laboratories, a research wonder of the world, yet the offspring of a huge monopoly?
Admittedly, the Bell Labs, unsparked by competition, could do no better than to invent the transistor and to acquire a Nobel Prize or two for its trouble. But how does one explain this prowess in an institution innocent of competition and nurtured by monopoly?
Actually, one can make the case that research and innovation stem not so much from competition as from high profits coupled with an inquisitive management. Many highly competitive industries are notable for the poverty of their research. For example, meat packing may produce a profit of one percent on sales. The competition is intense, with scant funds available for research. That leaves
a disturbing question: Will the new,
leaner communications competitors out-innovate their bloated, but apparently creative, predecessors?
The Cost of Choice
No idea is dearer to the hearts of economists than "choice," unless it might be "marginal cost." The traditional monopolies have been held up to scorn for the lack of options in their services. Would not a more entrepreneurial-minded competitor offer a more diverse package of services, and at a variety of prices? Electric power, for example, is said to be too expensive because it is too reliable. Arguably, an unregulated power company might offer a discount for "pretty unreliable" service. Now that's a real option.
How do we know that consumers do yearn for options in utility service? Ask any economist, who, of course, knows the consumer's mind better than the consumer. A viewer should be delighted with 500 cable television channels, just as she takes pleasure in choosing among innumerable long-distance telephone deals, all plugged incessantly on television. And wouldn't she love to try a totally unknown long-distance company while she's holed up at a ski resort? She could even make her own deal for electric power wheeled in from Tasmania.
Why shouldn't a consumer enjoy a choice of voltages for his household electric service? After all, 440 volts might be more efficient than 110, even though 440 carries the threat of electrocution. Consumers are thrilled at the number of places they can go to buy a phone, even if they don't know whom to call when the phone is dead. And the choices offered on a voice-mail menu surely represent a great improvement on the human operator (em now on layoff.
Incentives for Some
Other, more wistful memories still linger from the era of the regulated monopoly. One such memory recalls the cadre of secure and contented employees with lots to spend at the local department store at Christmas. Utility executives and managers always stood available to lend a hand with the annual drive for the Community Chest. Such homely touches may find no refuge in the gaunt world of competition. Regulated monopolies served as exemplars of lifetime employment and of a dependable and enduring community role, but these comforts are likely victims of competition. Markets focus on efficiency. International markets, particularly, demand tireless vigilance in jettisoning surplus human resources.
Deregulation and competition offer fewer jobs and smaller pay for ordinary folk, but better stock options for the folks at the top. Competition pushes worker pay down, but pulls executive compensation up. Getting competitive means different things to different people. Incentives for lesser employees are not needed as they seem to be in the case of executives. Chief executive officers (CEOs) apparently need incentives, preferably tied to the stock price, in order to get them to do their jobs. Workers seemingly will do their jobs without incentives.
Homage to Averch-Johnson
The philosophy animating many of the antique monopolies was peculiar. Without becoming maudlin, one should recognize that the obligation to serve often rose above a simple legal theory. Admittedly, the rendition of service marked the sine qua non of retaining an exclusive franchise, but in many a hulking monopoly, the notion of service developed a life of its own. Utility managers were compelled by law, and by their own peculiar culture, to keep the lights on or the phones ringing (em no matter what. Admittedly, monopoly managers knew they would someday recover the cost incurred in such efforts (em however astronomical (em in regulated rates.
That guarantee of cost recovery gave rise to the Averch-Johnson effect. Under that hypothesis, utilities built more and bigger plants than necessary to earn a higher return. Supposedly, under competition this distortion would disappear (em just another victim of efficiency. Nevertheless, Averch-Johnson has supplied a handy demon to invoke in hostile musings about regulated monopolies. Now critics won't have Averch-Johnson to kick around any more.
Mergers and Mutual Funds
The new era portends yet another predictable yet ominous prospect. In the age of pitiful, stumbling monopoly giants, there appeared no need for mega-mergers (with apologies to Sam Insull). After the holding companies suffered their death sentence, they were not replaced. Now, in the age of deregulation and competition, mergers are proposed on every side (em ostensibly to reduce costs and to fortify the participants for competition. This new strength will derive, it is said, from eliminating duplication. This dreaded "duplication," in most cases, seems to mean duplicate people (em an affliction easily cured with pink slips. That remedy poses no concern for any except those who have been duplicated. The remedy for duplicate CEOs is a bit more dicey.
No modern vision would be complete without some plaything for speculators that provide honest work for brokers. Why not match futures and options in electric power with straddles in natural gas? As pork bellies slowly fade, juice can fill the void. Too bad Insull isn't here for this development! A mutual fund would be just the ticket.
In the old days, no one saw much reason why a monopoly should need to advertise its wares to captive customers. Advertising costs were disallowed. Now marketing strategies for the competitive successors of regulated monopolies call for huge advertising campaigns. Evidence can be found in the long-distance telephone arena, where incessant touting of diverse calling plans seems to be the major marketing tool. Some believe these methods contribute significantly to customer options. Others contend that they only contribute to customer confusion. Whatever the view, there is no doubt that advertising is expensive. Telephone companies (em as well as breweries, soap purveyors, carmakers, and politicians (em all help mightily to sustain the television networks.
In bygone days, regulated monopolies generally tried to pursue policies intended to keep equipment in service for its useful life. Thus, telephone companies assessed an extra charge for callers that chose pastel telephones, so as to keep the plain but svelte black models around for a while, avoiding their premature retirement. These days, competition obviously "retires" equipment at any time it becomes supplanted in the consumer's favor by a new model. In this respect, competition is wasteful, and the old ways more frugal. By the same token, the regulated monopolies were more conserving of people, since they generally kept them on board for their useful lives rather than junking them prematurely. The new way, which contemplates "downsizing" on a continuing basis, is economical of money but somewhat profligate of people.
The current scene is also different from bygone days in another major respect. Some years ago, regulated monopolies sought to diversify their businesses and to escape the dead hand of regulation by entering new and different kinds of business. Perhaps due to the inadequacies of executive pay, these forays into diversification met with mixed success. Whether it was insurance or real estate, these new lines of business all appeared to share one thing in common: The diversifiers did not know much about them.
Currently, as they prepare for competition, the great regulated monopolies are not going into new businesses in the United States. Instead, they are going into the same business that they have always been in, but they are doing it in distant, and sometimes exotic, parts of the world. Presumably, this strategy reflects the plausible assumption that the companies know more about foreign countries than they do about the real estate business. But these bold firms may have a problem: To the locals, they'll tout the capital they brought and the jobs they created. But the locals will see only the profits they grabbed and the customs they flouted.
Nothing to Lose
And so we move from the dead hand of monopoly to the lively hand of competition. Confirmation comes from the blizzard of clinics and panels and seminars and conferences (em and, of course, trade journals. The "vision thing" is in; visionaries are in vogue. The comforts of the past are to be trashed, though they may be later treasured in some world yet unforeseen.
So is it all gain to be rid of regulated monopoly? Yes, we can discern, shimmering on the horizon, the holy city of technology, all stirred up by competition. Technology promises everything but guarantees nothing. Luddites of the world, unite! You have nothing to lose but your PIN! t
Judge Richard Cudahy sits on the U.S. Court of Appeals for the Seventh Circuit. Previously, he served on the Wisconsin Public Service Commission, and wrote a concurring opinion in the 1974 Madison Gas & Electric rate case, often cited as the first major electric rate decision to recognize falling economies of scale and endorse marginal-cost pricing.
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