When you hear the word "monopoly", what's the first thing that comes to mind? Perhaps it's flashbacks to passing your fake money across a game board to your no-longer-friend who turned out to be a secret real estate mogul. Maybe it’s Buy-N-Large, the mega corporation that sends all of humanity out to space in Disney fiction. Perhaps it’s Disney itself, as it acquires yet another entertainment studio. “Monopoly” is a word laced with negative feelings and bad connotations. But under what circumstances could they be classified as a positive thing?
Having been working in utilities for nearly four years now, I’ve had the opportunity to work with utility providers across the nation from New England to Hawaii. Some of them are big names that make the news, some are small town providers. At the end of the day, they all share a mission to deliver energy into the hands of the public. It’s in this context that I really began to understand the idea of a “Natural Monopoly”.
Let’s begin by first making sure we understand that markets work on a spectrum. On one end of the spectrum, we have what’s called “perfect competition”. That means all firms selling the same goods are all taking whatever prices they can get, with more power in the hands of the consumers. If one firm tries to get an advantage over another by raising their prices, the consumers will naturally flow away from that firm for the just as good alternatives that the competitors offer. This forces all firms to keep their prices low. The only hope that they have to gain more of a market share is to produce something new that their competitors cannot, thus separating themselves from the pack.
On the opposite end of the spectrum, we have the monopoly. This is where one firm has all the power because they control the supply of a good. They will cut the supply and cause an increase in prices right up until there is no more money to be made, and they’ll hold the price there. This can cause all sorts of inefficiencies in the market as there would be so many consumers who might need that good who are unable to due to the high price of it.
Now, imagine a world where the utility market was one of perfect competition. They are all selling their energy at a low price, but they’d all need infrastructure to get it to you. The very last thing you want is for Nateville Gas & Electric and their competitor Nate Co Energy to be tearing up the road you live on so they can both lay down energy lines to the same house. This would cause you such a headache with the round-the-clock noises of road construction, delays in your morning commute, and your food delivery order would arrive late every time. Perfect competition would not work.
So what’s the solution? Well, for a while we’ve had some states give monopolies to certain companies in the interest of efficiency! These are those natural monopolies I brought up earlier. When there’s only one firm tearing up the roads and laying down infrastructure, things can go a lot more smoothly. These exist in “regulated” states. By handing a monopoly to a certain company, and then keeping a close eye on them, states are able to better ensure that energy is supplied in a much more efficient way to all consumers. That regulation is key, however, because a firm wants to make money and will always find ways to maximize its profits with respect to the constraints that limit it.
That was the main point that I wanted to put forward today: that when regulated carefully, a monopoly can actually be a helpful model. If that satisfies your economic curiosity for the day, then I appreciate you taking the time to let me tell you something new, and I bid you adieu. But if you want to hear more about the way competition can succeed in the utility market, then read on! Consider this next bit to be a little bonus - a post-credit easter egg, if you will.
Certain states in the US practice a deregulated model of energy supply. In these states, Nateville Gas & Electric and Nate Co Energy can both offer their energy at low prices, and simply deliver it through the infrastructure that already exists! Let’s say that this infrastructure was originally built by Powerline, a firm that held natural monopoly status for a time. As the state turned from a regulated market to a deregulated one, our two competitors rose up and were able to make use of Powerline’s infrastructure, while paying a small cut of their income to it. We live in an age now where there is so much infrastructure that such a model is possible, and more and more consumers are able to choose for themselves what energy provider they want to purchase their energy from. This will obviously incentivize firms to behave themselves and provide the best customer experience they can so as to capture as much of the market for themselves as possible.
There will still be a need for some regulation, however. It was through controlling the infrastructure of the oil market with often cruel calculations that got John D. Rockefeller his massive wealth at the expense of innovation. But if we can strike a balance somewhere on the scales of freedom in the markets and government control, then picking a provider to power your home can become as common place and stress free as choosing a favorite brand of chips.
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