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.

Natural Monopoly

The term to be thusly defined.

Rightly be Called

As in, an honest definition, free of policy constraints or any personal agenda.

Though, it probably wouldn't be hard to argue that my personal agenda is to craft a definition that meets my needs.

Single Network Provider

Monopoly and Single Network Provider may be taken as synonymous terms in that a Natural Monopoly is necessarily a subset of All Possible Monopolies.

Spontaneously Converge

That the sum of forces intrinsic to the Market favor the existence of a Single Provider.

If there are Many Providers, the sum of forces will favor reduction to a Single Provider.

Through mergers, acquisitions, or straight out competitive elimination (bankruptcy), other providers will disappear.

And if there is a Single Provider, fracturing the market to Multiple Providers will not be profitable.

Thus, if one can show that a new competitor could successfully enter a market, this is proof in itself that the market in question is not a Natural Monopoly.

To me, Spontaneous Conversion must be at the core to any logical definition of what is meant by Natural Monopoly. If a market would naturally tend to settle into a Monopoly, then that market is an example of a Natural Monopoly. However, alternative definitions emphasise efficiency: as in, if a market would be more efficiently served by a Single Provider, then that Market is an example of a Natural Monopoly.

I suppose this could be interpreted as a case of six of one and half dozen of another. But to me, the critical difference is in ease of refutation.

If the criteria is Economies of Scale, then one must only show that the Single Provider is more efficient than many.

However, the belief in the supremacy of a Single Provide will likely to correlated with one's view of the intrinsic efficiency of Socialism.
And controversies over the weights to be given to of various factors of production will be at the heart of the debate.
Thus, making Economies of Scale a terrible benchmark.

If, on the other hand, Stable Convergence to a Single Provider is the criteria, then to refute the proposition that something is a Natural Monopoly, one must merely show that there is a way for a business to make money (and therefore, in a free market, that a business would make money) by independently providing any small part of the Monopolist's Business.

If a competitor successfully enters a market, then said market is not a Natural Monopoly.
This means, Natural Monopolies do not require trade protection.
And more to the point, if there exists any viable competitive strategy to a business enterprise, then that enterprise is not a Natural Monopoly.

Thus, to prove that any given market is not a Natural Monopoly, all one need do is in present a viable business strategy for any small part of the market in question.

This, of course, may likely reduce to a game of ever receding goal posts. But even if that is the case, I shall have proved my point.

"Well, yes. Airports may not be Natural Monopolies, but individual runways are."

Would

These are all opinion statements.
Consideration of the specifics must be taken as a whole.
Or in other words, this is an abstract discussion and perhaps only meaningful at the level of abstraction to which it is presented.
Or if that's not clear, the Real World IS.

I do not believe Natural Monopolies are part of the Real World.
However, government regulations and market controls are.

Thus, one can easily argue that it 'is' what it 'is'.

To which, I won't disagree.
Not everyone wants to play the if/then game.

Market

Markets are elastic concepts.

The Transportation Market...
The Train Transportation Market...
The Train Transportation Market between Chicago and New York...
The Train Transportation Market between Chicago and New York on this track at this time using this equipment using this crew, etc.

At some point in the progression, we aren't really talking about a market.
There is a sole provider.

And if one wishes to call this sole provider a Natural Monopoly, have at it.

Typically Markets are discussed at the more generalized/macro levels; and it here that I shall approach them.

Unregulated

Government mandated monopolies are not natural in any sense of the world.

Copyrights.
Patents.
Government Charter.

The Military.
Postal Service.

Free

The markets in question shall be considered free from government regulation.
Except, it will be assumed that the government enforces The Moral Good.

This is not a treatise on The Moral Good.
Suffice it to say that The Moral Good will be deemed to be enforced.
And as such, Mob Rule, Mafioso, and other like Underhanded tactics need not be defined as they don't even exist.

Nor will we discuss whether the government itself is a Natural Monopoly, save to say the existence of foreign countries refutes this proposition by the metric I shall use for the rest of my discussion of Natural Markets.

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.

A typical farmer who grows grain (a commodity crop) does not sell their harvest in the field; but rather, to a nearby granary.
Transporting the crop to the granary is an expense and directly impacts how much money the farmer will make.
Further, the price that the local granary pays the farmer is (almost universally) determined by the 'fair value' of the grain as set by some distant exchange (say the Chicago Board of Trade): less the granary's profit and the cost of transporting the grain to some standardized location (say the Mouth of the Mississippi).

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.).

A rational actor strives to maximize earnings: i.e. they will not leave money on the table or forego a deal if a profit is to be made.
Thus, if the value of land can be increased by improving a network, said network will always be improved.

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

Natural Monopolies don't exist.
Rather, only Regulated Monopolies exist.
Thus, the argument that Natural Monopolies must be regulated de-constructs into a rather silly circular line of reasoning:

Monopolies that exist due to regulatory action must be regulated lest they abuse their regulated powers (i.e. their government given Monopolistic Status).

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

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