Brett Rants

The
Natural Monopoly
Myth

There are no Natural Monopolies,
only those enforced by the sword.


Natural Monopoly: A Definition

A Free8 Unregulated7 Market6 which Would5 Spontaneously Converge4 to a Single Network Provider3 can Rightly be Called2 a Natural Monopoly1.
  1. Natural Monopoly
  2. Rightly be Called
  3. Single Network Provider
  4. Spontaneously Converge
  5. Would
  6. Market
  7. Unregulated
  8. Free


Reducing the Class of Possible Natural Monopolies to those that constitute Networks


Being Granted an Exclusive Government Charter does NOT a Natural Monopoly make.

There is no patent nor copyright that can be held as an example of a Natural Monopoly. All such grants are done by government fiat. And as such, any monopolies that result are not natural.


There is no organization nor structure so lucky as to have no competitors or detractors. Competition IS the Natural State.

First, there is no one thing of anything. No one government. No one military. No one religion. No one city. No one grocer. No one anything. Everything exists in competition. There are multiple paths to securing any need or desire. All these paths (call them substitute goods if you like) are by their very nature in competition with one another. As the defining example, the United States of America (perhaps the most powerful, all encompassing, institution in the world) is continually challenged by foreign governments, militants, and home grown criminals (not to say that these three classes are in any way equal or synonymous, just pointing out, the Good Ole US of A is not without its detractors inside and out: i.e. it has competition). But even more than this, it is quite obvious that the power of the United States over its domestic institutions (States Rights, Corporate Entities, PACs, Lawyers, and Special Interest Groups) is limited and in flux. In short, the United States is in competition with that which it governs, over the very nature of that government, if nothing else.

But, I can see how that might be a bit too political (and/or abstract) for many (and the leap to our current discussion on Natural Monopolies is more implied than explicitly drawn out). So, let me restate the above in a more limited fashion.

There is no industry so large and complex that it cannot be served by multiple institutions. Yes, there may be economies of scale (just as there are often dis-economies of scale), but those scales are universally dwarfed by the overall size of the actions of man. Or in other words, as large as an iron foundry is and the vast sums of capital required to construct one, there still remains the need for hundreds upon hundreds of foundries scattered around the world. And thus, no single foundry or industrial method comprises a natural monopoly by the definition I have provided.

What may be less clear (and/or more debatable; and therefore the subject of the remainder of this rant) is my contention that networks (be they transportation networks, water networks, telecommunication networks) are not (as a class) Natural Monopolies. But before I begin, let me concede that I cannot definitively prove the point... no more than those who claim the opposite (that there exist Natural Monopolies) can prove their point. One can simply put forth a reasoned argument and hope that it finds favour.

Or perhaps, a better way of saying that would be: the following argument relies (in my humble opinion) upon the same dynamics as contained within the Coase Theorem... and therefore, is subject to the same sort of arguments both for and against said same (the Coase Theorem itself being a matter of opinion and disagreement and its relation to the Real World subject to debate; or so, many might claim).


Corn to Market

A resource without a market has no value.
Therefore, a resource with no way to market is valueless.


In bringing Corn to Market, the 'bringing to' costs money and determines the final amount paid for the corn.


Stated more simply, a farmer earns money based on the value of their crop, which in turn is determined in part by the local transportation network (the cost of bringing the grain to market).

None of this should be contentious. And in my opinion is simply a description of what is.

The real twist (if any) is introduced by looking at the farmer's operation (the outline presented above) alongside the underlying value of the farmer's land. Land values, of course, change, but a reasonable formula for determining the value of a commodity input (the land) to a commodity output (the grain) can be expressed as:
Cost_Acre = Value_Crop * Yield_Crop * Multiplier

Cost_Acre = value of land per acre
Value_Crop = expected revenue per crop unit (perhaps in bushels)
Yield_Crop = expected yield of said crop per acre of this land
		(this is the part where better land gets a higher value,
		and also in bushels.)
Multiplier = Value_Crop and Yield_Crop provide a yearly income,
		but don't take into account costs
		(including forgone opportunity costs if capital is expended upon
		farmland rather than savings certificates, or whatever);
		and in my experience, for farmland,
		this number tends to hover around 10)

Thus, in my experience (dealing with farml land in the Midwest used for growing corn), land tends to be worth (almost exactly) ten times the yearly gross revenue that is expected to be derived from the land. Expected being a very important qualifier therein (to the point that one could argue that different expectations are the primary mover of the land market, but I digress).

For our needs, the above is perhaps an overly complicated formula (or not complicated enough for some). But what the formula demonstrates is that the value of land is linked to the value of what that land can produce. And what the grain pricing analysis shows is that the value of what the land can produce is inextroably linked to the cost of nearby transportation networks: i.e. the value of any land is directly tied to (and dependent upon) any associated (nearby) transportation network(s).

Reduced to absurdity:
    An apartment building with no access will attract no renters.
Less absurd:
    An apartment with convenient access to transportation (closer to the train station, highway on ramp, airport, etc.) will command a higher rent compared to apartments with inconveient access.

This shouldn't be controversial; but rather, so obvious as to be trivial.

And the conclusion we can reach from all this is that the value of ALL land is intrinsicly tied to the underlying transportation networks. Thus, if the underlying transportation network is deficient, the value of the associated land can be increased simply by improving the underlying transportation network.

And because this is the case, eventually (as the equilibrium state is reached) all such underlying transportation networks will be improved if it is economically rational to do so.

This last might not seem self apparent, so let's break it down. But as I do, I will leave off the 'transportation network' qualifiers, because this is true for all networks (water mains, telephone lines, cable service, etc.).


Thus (I suppose to the extent one believes the Coast Theorem, which I guess I do), there exists no case in which an improvement will not be made or where Imminent Domain need be enacted by a Centralized Committee, because being rational, agents will always sell their land to anyone who has a strangle hold over them or those who have the stranglehold will sell the right to the stranglehold (for the right price, of course). Which means, the perversity of a stranglehold simply can't exist long term.

Implications for the Regulation of Natural Monopolies


Heck! That last might even make sense to some folks (politicians, certain government employees, or perhaps representatives of the professional bureaucracy, you know, just at a guess).

But to me, it would be much more rationale to say:

Any regulation which goes beyond that which is required to enforce The Moral Good only serves to the distort the marketplace: and as such, no Good can come of it.


Or, if that sounds a bit too combative, perhaps:

Regulations that regulate the regulations should be regulated to the dustbin of history.

Why?
Because as we all know, two wrongs do not make a right.
Rather, most assuredly, they take at least one right away...


Thus Spoke Zoroaster
Or, er, that is to say,
Thus Spoke The Mighty Brett


next Brett Rants entry


Home Brett Rants Index


The Moral Good:
If a law is not in service of that ideal,
It is most assuredly in service of the opposite.



© copyright 2015 Brett Paufler
Brett@Paufler.net