Monday, 10 August 2015

Economic Myths: Monopolies

Traditional thinking is that a monopoly means that there is one single supplier of any particular category of goods or services.

It's a fair enough starting point, but then people tie themselves in knots trying to decide how widely or narrowly this should be defined. So there might be only one ferry company between Port A and Port B, but if there is also a road bridge and an airport connection between A and B, does the ferry company really have a monopoly etc. Further, having a monopoly is no guarantee that your business will make super-profits or even profits. Even if you are the only ferry between Port A and uninhabited island B, if there is insufficient demand, the service might well be loss making.

But this is all pretty irrelevant, all that matters to the man in the street is this simple observation:

... in a perfectly competitive market there is a well defined supply function with a one to one relationship between price and quantity supplied. In a monopolistic market no such supply relationship exists. A monopolist cannot trace a short term supply curve because for a given price there is not a unique quantity supplied. As

Pindyck and Rubenfeld note, a change in demand "can lead to changes in prices with no change in output, changes in output with no change in price or both".

That makes indentifying a "monopoly" much easier, you can put "land" at the top of the list. It does not matter how much you sub-divide land or how many million owners there are; a change in demand leads to a change in price with no change in quantity supplied.

Copyrights and patents are another kind of government-protected monopoly. You write one book or invent one thing, the amount of money you can earn from it depends entirely on demand and bears little relation to the effort or skill you put into it.
Having established what a monopoly is, as a separate issue, BenJamin' and I have discussed this to death, whether and what we 'should do' about a monopoly depends on how it arose. Depending on the circumstances, the correct response is either:

1. Do nothing. Who cares if super-rich people keep bidding up the price of Picassos? Copyright periods are probably too generous but patents expire after twenty or so years, which seems fair enough.

2. Reduce barriers to entry, especially if they arise from government regulations (for example taxi driver licences).

3. Cap prices (for example with utilities).

4. Tax away the super-profits (such as a Land Value Tax or imposing a higher tax on copyright royalties).

5. The government provides a low-cost alternative, like state education, social housing or the NHS.

6. In some situations, it might be better just to nationalise something (for example refuse collection).

UPDATE: Lola points out that refuse collection is no longer 'nationalised'. It is taxpayer funded but sub-contracted to competing providers. This is one of the examples where this works well. But whether such a service is truly nationalised or taxpayer-funded/sub-contracted is a secondary issue in the context of 'monopolies'.


Lola said...

Re 5. You don't actually need to nationalise it. You just recognise that there is going to be a free rider problem and you collect money to pay for it by way of LVT and then contract out the actual work. And you explain to tax payers that you are doing it this way to protect them from free riders.
Or you have Rubbish Police (which we already have IMHO) to enforce non-rubbish disposers - which won't work.

Lola said...

In re 3, you need to cap prices but also make sure that you remove all barriers to entry.

Lola said...

MW. Something else occurred to me about refuse collection funded by taxation - it is not, or needn't be - a monopsony. Since we can have competing tax authorities, i.e. local authorities. Those that charge high fees within LVT for rubbish collection will see a decline in local land values and a decline in income and an exodus of the pissed off rate payer.
Looking better all the time.

Sean Vosper said...

I think Copyright is protected for Artist's lifetime, plus 70 years, and can be passed on to human offspring descendants, ie children. Patent law is 17 years I believe from when the good is first registered hence why pharma sometimes still has to wait a few years before medicine actually reaches the market.
But those monopolies should be addressed. I humbly suggest adding it as a second string to the excellent 1st string of LVT.
Some people have suggested shortening patents to say 5 years. Others that it should be granted and then be auctioned off for another x years.
But taxing is an interesting possibility I hadn't really thought of before.
Thing is - it needs fine judgement - you want to reward firms that put a lot into R&D (not sure individual inventors are really a thing anymore). But, you don't want crap music earning it's writer's kids a lifetime of comfort because XMAS, etc.
Strong patents in tech seem to spur the rest of the market to work around it and encourages laziness in the originator. Also, Samsung/Apple patent wars, wtf?!

Mark Wadsworth said...

L, I have updated and 'exactly'.

SV, agreed and I have been saying this for ages.

But taxes on patents and copyrights are - in absolute terms - way down the list, the biggies are LVT, bank asset tax and fuel duty. Next is radio spectrum, I think, then utilities. Plus re patents and copyrights, the UK has loads of double tax treaties which would need to be re-written and that takes years and does not necessarily lead to a favourable net outcome.

Bayard said...

"a change in demand leads to a change in price with no change in quantity supplied."

I thought we had all agreed that this was not the case and that land did not go up in price if demand went up, but only when the potential buyers were able to offer more money for it. That doesn't mean to say that land isn't a monopoly, in fact that is why price is insensitive to demand.

Mark Wadsworth said...

B, come on. I am using "demand" in the narrow economic sense which does not mean "want" or "need" it means "willingness AND ability to pay".

So starving Africans clearly "need" or "want" fresh water and food etc, most of them are not "willing and able" to pay so there is no demand. Which is why they export food to us and not the other way round.

Westerners are "able" to pay for Bakelite land line telephones with a crank handle, but they are not "willing" to pay for them, so again, no demand.

Random said...

What about the currency monopoly. A good example of this is:
The ECB is lowering the standard of living of eurozone countries by printing euro and buying $ treasuries.

Kj said...

Copyright is sort of taken care of already, digital distribution has more or less obliterated any "superprofits" from music, film, books or texts. But the terms are insane. Keep it to the minimum allowed in the Berne convention.

Kj said...

BTW on monopolies that are law-made, this is an interesting case. In some cantons in Switzerland, they have mandatory buildings insurance, and it's a public insurance company that has the monopoly. AFAIU it means you just get a bill, the public company has assessed your house and and puts 0,x% charge on it. The voters don't seem to be bothered by the monopoly situation, maybe because there is very little innovation that could be had, and costs would be higher. Sure, a private non-monopoly would introduce better risk-ratings and differentiate premiums more, but at the cost of total insurance premiums paid in going up. This is where the nuanced analysis on a case-by-case basis comes in, before DBC comes in insisting on public monopolies on everything on this basis ;)

After a short presentation of this discussion
three reasons for the higher efficiency of the public
monopolies are given. Then, arguments in
favour of their privatisation are discussed. These
arguments are, however, not convincing: It
does neither economically nor politically make sens
e to abolish the cantonal monopolies in
order to introduce competition in these markets.

Kj said...

BTW the latter is not an example of anything close to a "natural monopoly", it's more of an argument against the efficiency of insurance. I think it's problematic to have such a monopoly on purely libertarian grounds, and having mandatory insurance is not necessarily called for with buildings, but at the same time it's something that 98% would have anyway.

Lola said...

Kj - Fire insurance cover in urban areas is really bought to protect your neighbours. So we go back to the free rider problem, which is 'solved' by funding the local fire service from rates. This both ensures safety for property for all residents, and reduces insurance premiums for those who do pay, and there are no free riders.
The fire department is a bureaucracy run on semi military lines to ensure that it does not manage to achieve too much producer capture.
In the UK unionisation has enabled fire service workers to extort over generous terms and conditions of employment, but that is not an argument against nationalised fire services - it's an argument against union power.

Mark Wadsworth said...

R, yes, I suppose.

Kj, compulsory buildings insurance seems unfair to me, but as L says, if the insurance pays for fire brigade i.e. for the benefit of your neighbours, then that is perfectly reasonable.

With mass insurance where nearly everybody is insured or protected*, it makes sense to me to nationalise it and thus save on overheads, it can just be paid out of general taxation.

* For example cars have to be insured against damage to third parties. The people who benefit from this is theoretically "everybody". And most countries take it for granted that health insurance is compulsory and run by the government. You could view "free education" as a kind of mass insurance too.

Bayard said...

"I am using "demand" in the narrow economic sense which does not mean "want" or "need" it means "willingness AND ability to pay".

Well surely, the "economic sense" is the same sense as in the concept of "supply and demand", i.e. the theory that if demand goes up and supply stays the same, prices increase, plus all other permutations. Which is what we don't see happening with land. The supply is largely fixed, except for microeconomic conditions, like within a single housing estate, the "willingness" bit is, for some psychological reason, almost always turned up to the max, so that the only variable left is the ability to pay.

Kj said...

Lola: agreed, but this example is just insurance, fire protection is separately funded.

Mark Wadsworth said...

L, Kj, as usual we are drifting off the topic.

I think that UK insurers are reasonably competitive between themselves and I do not think they are a monopoly.

it is just that I do not see the point of making it compulsory for nearly everybody to spend their money on something which is then provided by the 'private sector'. That is a sort of subsidy.

In the case of car third party insurance, the taxpayer still bears the largest costs i.e. medical treatment of injuries, so why not just include insurance in the price of petrol?

This seems to work well for the fire brigade and indeed the police and plenty of other things.

mombers said...

An interesting thought I had regarding BTL and monopolies. There was much bleating about the mortgage interest deduction restriction announced in the budget. BTLers said they should be treated like any other business and be allowed to deduct interest. But what sort of business should they be treated as? A competitive one like supermarkets, allowed to set their own prices and under fairly loose regulation? Or something like Thames Water, a natural monopoly that needs its prices to be regulated on a cost plus basis, i.e. build the infrastructure and add on a normal profit? I say the latter of course! The principle should be extended to house sellers as well, off course via the most efficient means - LVT