Books / Digital Text

10. Monopoly and Competition > 3. The Illusion of Monopoly Price > E. Some Problems in the Theory of the...

(2) Natural Monopoly

A favorite target of the critics of “monopoly” is the so-called “natural monopoly” or “public utility,” where “competition is naturally not feasible.” A typically cited case is the water supply of a city. It is supposed to be technologically feasible for only one water company to exist for serving a city. No other firms are therefore able to compete, and special interference is alleged to be necessary to curb monopoly pricing by this utility.

In the first place, such a “limited-space monopoly” is just one case in which only one firm in a field is profitable. How many firms will be profitable in any line of production is an institutional question and depends on such concrete data as the degree of consumer demand, the type of product sold, the physical productivity of the processes, the supply and pricing of factors, the forecasting of entrepreneurs, etc. Spatial limitations may be unimportant; as in the case of the grocers, the spatial limits may allow only the narrowest of “monopolies”—the monopoly over the portion of sidewalk owned by the seller. On the other hand, conditions may be such that only one firm may be feasible in the industry. But we have seen that this is irrelevant; “monopoly” is a meaningless appellation, unless monopoly price is achieved, and, once again, there is no way of determining whether the price charged for the good is a “monopoly price” or not. And this applies to all circumstances, including a nation-wide telephone firm, a local water company, or an outstanding baseball player. All these persons or firms will be “monopolies” within their “industry.” And in all these cases, the dichotomy between “monopoly price” and “competitive price” is still an illusory one. Furthermore, there are no rational grounds by which we can preserve a separate sphere for “public utilities” and subject them to special harassment. A “public utility” industry does not differ conceptually from any other, and there is no nonarbitrary method by which we can designate certain industries to be “clothed in the public interest,” while others are not.56

In no case, therefore, on the free market can a “monopoly price” be conceptually distinguished from a “competitive price.” All prices on the free market are competitive.57

  • 56. On “natural monopoly” doctrine as applied to the electrical industry, see Dean Russell, The TVA Idea (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 1949), pp. 79–85. For an excellent discussion of the regulation of public utilities, see Dewing, Financial Policy of Corporations, I, 308–68.
  • 57. See Mises:
    "Prices are a market phenomenon. ... They are the resultant of a certain constellation of market data, of actions and reactions of the members of a market society. It is vain to meditate what prices would have been if some of their determinants had been different. ... It is no less vain to ponder on what prices ought to be. Everybody is pleased if the prices of things he wants to buy drop and the prices of the things he wants to sell rise. ... Any price determined on a market is the necessary outgrowth of the interplay of the forces operating, that is, demand and supply. Whatever the market situation which generated this price may be, with regard to it the price is always adequate, genuine, and real. It cannot be higher if no bidder ready to offer a higher price turns up, and it cannot be lower if no seller ready to deliver at a lower price turns up. Only the appearance of such people ready to buy or sell can alter prices. Economics ... does not develop formulas which would enable anybody to compute a “correct” price different from that established on the market by the interaction of buyers and sellers. ... This refers also to monopoly prices. ... No alleged “fact finding” and no armchair speculation can discover another price at which demand and supply would become equal. The failure of all experiments to find a satisfactory solution for the limited-space monopoly of public utilities clearly proves this truth." (Mises, Human Action, pp. 392–94; italics added)
Shield icon library