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MONOPOLIES AND OLIGOPOLIES

What’s in it for them?

But why, why would a company willingly demand a regulation or a monopoly? For a monopoly, this is easy to answer: they can impose any price they want. But why a regulation? Simple. it raises the barriers to market entry for other competitors. It makes it much more difficult for other companies to compete against them. Established companies normally have a large market share (i.e. they sell a lot) and therefore they have a steady profit. They demand regulation and they are happy to pay for its costs from the profits they already have in order to protect their price and market share. On the other hand, new companies are just investing. Anything that increases their initial costs is a large problem, to a point that it may make this investment, unsound.

Regulation is nothing more than artificially protected oligopoly. It makes it possible for an oligopoly never to evolve into competition. This is only possible through government intervention, not by market forces.

Furthermore, oligopolies can then concentrate in providing the minimum amount of goods and services at the maximum possible price. Who are you going to call to complain? The government is on their side!

 

The “nobody else will do” it excuse

Then, we never fail to hear from some well-intentioned person declaring: but if the government does not do it, nobody else will do it!

Well, for one, so what? We are pretty sure that there must be something, somewhere that is so critical and so important and so expensive that some government on earth, absolutely, positively, definitively and unquestionably must do it. When you find it, would you please let us know? Because, so far, we have failed miserably.

Every time we hear this excuse we shift gears and go into our standard explanation containing the following points:

  1. It wasn’t really necessary
  2. We were doing just fine without it
  3. We were on our way to that point anyways
  4. It was too expensive and
  5. It became way too expensive and
  6. It is obsolete now because there was no follow-up
  7. It created all kinds of problems
  8. It prevented other products or services to be developed

That’s pretty much the core of it. Of course, there is plenty more where it came from. In order to fully appreciate these points, allow us to illustrate them with an example. The UK electrical grid.

Once upon a time UK lacked a country-wide electrical grid, but Germany just got a brand new shiny one. Therefore, UK just had to have it.

Never mind people were doing just OK with other kinds of illumination, heat, cooking and industrial machines. It all worked and satisfied people’s needs. Electrical companies begun to appear in larger cities, particularly in London, where they competed for the more lucrative niches. Electricity was expensive, true, but its price was going down. Market entry was reasonable. A few investors could pool together sufficient capital to start an electric company. As a matter of fact, in 1926 there were 122 power generating stations. In other words, the market was beginning to take care of the problem. Never mind, they had to have a national grid.

And so, in a typical government fashion, they designed this gigantic grid system that would crisscross the country delivering electrical power to the farthest reaches. This grid would be government-owned (obviously) and would require a law (the Electricity Supply bill of 1926). Of course, this grid would be a “stimulus” to the economy… which would also generate a tidal wave of votes for politicians… that was never a concern…of course…

Industrialists all agreed. Electricity was too expensive and they needed to do something about it. Who is “they”? The government of course! Think about it. If electricity was too expensive for industrialists, it meant that the market was too small, otherwise they would have invested themselves. No. The solution was to “externalize” those costs. In other words, let the government pay for it and reap the benefits for free.

The project was simply massive, 4000 miles of transmission lines and over 100.000 employees. As a matter of fact, it was so massive and so complex that nobody knew if it would work until it was built! Just a task governments were created and taxpayers’ money was robed for. Of course, they had to create a brand new government organization (the Central Electricity Board) and raise taxes. It was for the “better good”. Never mind people did not want it. It was for their “better good”.

They crossed private property and installed gigantic, ugly towers wherever they saw fit. Never mind people did not want them. They had the “law” on their side. It was all for the “better good”. And so “rights of way” were imposed to over 22.000 individual properties with over 26.000 pylons. After a considerable amount of time (and money) the project was completed (strangely enough, ahead of time and on budget… must have been the first one) by 1933. But people still did not wanted it. Never mind, it’s for the better good.

There was only one problem; there weren’t enough people interested in electricity! The market simply wasn’t there, which is something that industrialists knew all along. At this point, the Grid was a very expensive white elephant. That’s precisely why they got the government to build it for them.

So the government, in their infinite wisdom, begun a massive marketing campaign to “convince” people they actually wanted electricity. The propaganda was so massive that it almost reached religious levels. They spent untold amounts of money on this campaign and finally, people begun to accept it. Of course, people had to fork the money to actually wire their houses, never mind they did not had appliances to plug in. But, electricity was cheap.

And so the government, in their infinite wisdom, decided to subvention appliances. Appliance manufactures were only too happy to oblige. They made a deal with the government whereby customers could purchase appliances in installments (typically 4 years) and they were billed through their electrical bill.

And so they addicted people to electricity. People became electricity junkies. So much people became addicted that, you guessed it, the grid could not cope with the load! By the late 1940’s there were power cuts all over the country and about 15% of workers could not attend factories simply because there was no power! And then “something had to be done”, sounds familiar?

Yet another massive government program to build power stations, this time closer to the recently nationalized coalfields. And amongst them, the first nuclear power station was also build…. at an astronomic cost… to the taxpayer.

When all these new, national, power stations went on line, the old grid could not cope. Solution? Something had to be done. Yet another massive government program to build the “Super Grid”.

When the new-and-improved grid was finished and because most of the power stations now belonged to the government, a simple wage dispute plunged the entire country into darkness! Talk about a single failure point! The situation was so dire, that the army was called in to provide emergency generators. Eventually the dispute was settled… only for a new one to begin. In 1972 coal miners went into strike. Since most of electrical stations ran on coal, the entire country was plunged into darkness for the second time. Yet another dispute arose…just in time for the 70’s oil crisis! The country plunged into darkness, rationing and malaise for the third time.

Meanwhile, nuclear stations were being built because “something had to be done”. These stations would be horribly over budget and plagued with endless delays. As a matter of fact, when the government tried to sell them off many years later, there were no bidders! So expensive were they to operate.

This is a prototypical story of “essential” services that governments simply “had to” provide. If you take a look at any other such stories, you will encounter the very same problems.


Note: please see the Glossary if you are unfamiliar with certain words.

Continue to We don’t need no stinking competition - Part 6

 

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