Monopolies - the good, the bad the …..
What are Monopolies?
Most people discuss monopolies and blame it for high allowing certain companies to get away with higher prices or unsatisfactory service levels. The argument here is that if competition is allowed, this would automatically mean lower prices or better service.
In the following text I look at the various types of monopolies, how they came to exist, and most importantly is competition always a good thing?
There are various types of monopoly. Let us look at the most common types in Namibia.
- Selling monopolies - a company is the only supplier of a product and the customers must accept the prices it fixes
- Producing monopolies - a company controls the manufacture or source of supply
- Trading monopolies - a company controls the marketing channel between the source and the customers
Furthermore, most monopolies are either national (countrywide) or local in geography.
There are three main ways in which a monopoly gets its power, either through the government (a political monopoly); through economic control by a company of a natural resource; or through commercial monopoly agreements between competitors.
A political monopoly comes about through a special government grant that forbids others to engage in this business activity. In countries ruled by monarchs this was often in the form of crown patents giving exclusive rights to carry out a certain business for example the collection of taxes. A second kind is the granted by a patent for an invention and copyright on books or music. In this form, the government encourages invention, research and writing by giving the full control of the "intellectual property" to the inventor or writer. It is recognized by all of us that such a monopoly is earned! Also the patent or copyright is limited in time, 14 years for patents and copyright for the lifetime of the writer. Another typical political monopoly is those for the supply of electricity, water or telecommunications. This last kind is often granted to state companies and encourages them to invest in areas that are helpful to the country and that normal capitalist (profit making) companies might not invest in. This is why it is important to have a Universal Service Fund when such monopoly rights are removed!
Economic monopolies come about when scarce natural resources come under the control of a company (or companies) who agree on the price. In most cases such economic monopolies could have been prevented had it been foreseen.
Trading monopolies come about when a company has ownership of subsidiaries that compete in the retail market in competition with companies that purchase its services wholesale. They are thus able to "share costs".
Government Policy on Monopolies
How does the man on the street react to monopolies or competition? Most of us agree that competition is a good thing in business as it brings about lower prices. Yet the same people would agree with me, the Zimbabweans are unfairly bringing down the wages or salaries we earn. This is where, dependent upon where we stand in relation to the practice or industry, our standpoints are developed.
The question is then, when is it acceptable to have a monopoly. The answer must be: When it can be regulated by Government.
Normally competition provides effective regulation. However, when a monopoly has too high prices, a competitor might build its own infrastructure, for example its own electricity or telephone lines next to the existing infrastructure. So we have to accept a policy of "monopoly-accepted" as a necessary feature for the public regulation of rates. We accept in Namibia that these industries are those that need expensive, permanent and use public areas (roads, electricity lines, telephone lines, etc.).
Thus it is in the interest of country to have monopolies in respect of the development and maintenance of the infrastructure. However, competition must be allowed in the provision of services that use it. Thus, to prevent the third type of monopoly, namely a trading monopoly, we cannot allow these state monopolies from selling directly to the public.
To use but one example, Telecom should become two separate companies. One, the owner of the physical infrastructure should continue to be the partner of government to ensure the roll-out of access to all Namibians (including receiving government funding where necessary). The second company must be a commercial company using the infrastructure at the same prices as its competitors and being able to sell directly to the commercial and individual customer.
For further reading see: "Modern Economic Problems" - Frank Albert Fetter, Professor of Economics, Princeton University, 1916