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Private monopoly vs public monopoly

Posted by Graeme in Market failure at 9:53 am on Thursday, 12 April 2007

The most sane (albeit not against a very high standard) of a number libertarian (or, at any rate, very pro-market) bloggers in Britain that I read, admits that network effects mean that many markets tend to “collapse” into monopolies. I would add that many more markets tend to become oligopolies or cartels. In the face of this, why does he still believe that leaving everything to the markets is the best way to run an economy?

As far as I can see, his position implies that he prefers private monopolies (which he admits arise) to public monopolies. I fail to see why they are better.

The argument for leaving things to the private sector is that competition forces firms to act in a way that delivers an optimal results. This is not true without competition, so what is so good about unfettered capitalism without competition. At least socialism in a democracy gives us some mechanisms to promote the public interest — and that is not even the best of the alternatives.

So, why leave everything the market?

Comments (8)


Comment by Richard Beddard at 11:31 am on 12 April 2007 at

Did you see this on Stumbling and Mumbling Graeme?

Basically Chris Dillow says the Brown years have been good for profitability but profitability does not necessarily equate to good capitalism. He seems to be making a link between monopolies born of regulation (which creates a barrier to entry). Is that the inverse of your argument?!

Comment by TDK at 6:07 pm on 12 April 2007 at

At least socialism in a democracy gives us some mechanisms to promote the public interest

There’s two parts to this. The democracy part, and the socialism part. A democracy gives us some mechanisms to prevent private monopolies or break them up, which fulfils the public interest requirement.

However, Socialism, by definition, is a monopoly under common ownership. It’s presence therefore precludes at least one possible solution to any weakness – private competition.

A private monopoly is obliged to pay at least some attention to satisfying its customer’s needs. The less well it performs this, then the lower the barriers to entry are for any competitor. It’s not clear why this would be the case for a nationalised monopoly. The history in this sphere show that of “Public interest” requirements tends to expand in scope, far beyond that of simply keeping the business in profit. eg. secure jobs that might otherwise disappear, build facilities in non-sensical regions based upon political considerations, focus time and funds on secondary “public interests” such as diversity efforts.

Comment by Graeme at 5:13 am on 13 April 2007 at

Richard, yes, it is supportin evidence for my contention, looked at from a different angle.

TDK, that is why I said socialism is not the best solution. Although, to be fair, some nationalised monopolies (post offices in many countires for example) have delivered pretty good services.

The problem is that a monopoly has to pay very little attention to customers demands. It is therefore a non-optimal solution, and it is not clear to me why it should be necessarilly better than a socialist solution.

I will blog soon on what I do think are the best solutions.

Comment by How the economy should work : capitalism, Economics, efficiency, market failure, market incentive socialism at 9:02 am on 13 April 2007 at

[…] Tassano has responded to my post on the problems of the emergence of monopolies and oligopolies in more and more markets. He appears to think it is less damaging than I do, and he also wants to […]

Comment by TDK at 1:23 pm on 13 April 2007 at

No one is disputing that a monopoly is a suboptimal solution.

But you ignore my point: “A private monopoly is obliged to pay at least some attention to satisfying its customer’s needs.”

The profit motive is a crude metric for satisfying customer needs but the fact that a private monopoly exists tends to indicate that at least in in the recent past, the monopoly was satisfying that need. Shareholder demands will tend to force companies to stay profitable. Monopolies tend to grow complacent over time and consequently competition arises afresh. The fear of this must have some affect to keep a monopoly inovating.

A state run company has no such fear. There is no mechanism to challenge complacency, beyond the fear of political change. Representative democracy has a number of flaws such as the Package deal problem mean that weaknesses in a state monopoly are not addressed. Even a direct democracy model is highly unlikely to be able to devote sufficient time to solve such problems. The workers Soviet model would hand control to a producer interest which would merge the problems of all monopolies.

I’m not convinced by your post Office example. Even if we assume the problems recently highlighted at Paddington are exceptions, the emergence of competitors seems to indicate some problems. However this raises an interesting side issue. It may be that in the past, there was more of a public service ethos that freed (say the NHS) from the problems that we hear about today. We might posit reasons for why this existed then but not now – maybe the war, maybe a recognition of common cummunity, maybe it was in fact overrated. If you want to argue for socialist ownership, you at least need to take into account this feature in previous “successes” and explain how it might be restored in future.

{PS: Your solutions talk about co-operatives, which is essentially only a way of privately owning the company. There is no reason to expect them to behave differently from any other kind of monopoly.}

Comment by Graeme at 1:42 pm on 13 April 2007 at

I do not see how your argument demonstrates that one sub-optimal solution (private monopolies) is better than another (public monopolies).

As for co-operatives I say co-operatives and mutuals. Where a monopoly exists, or where a supplier can lock-in consumers, one of my range of possible solutions is for for consumers to own the supplier. I would like to see more workers co-operatives in situations where they will compete in a competitive market: that is a solution to a different problem.

It is also interesting that the problems in the Post Office (the British one) are occurring as the government tries to push it towards privatization. The NHS also does not seem to have exactly benefited from the push to market solutions (yes, I do realise the picture is distorted by rising costs driven by new technology).

Perhaps public institutions are failing because governments think of them as second best solutions and formulate policy accordingly.

Also, I am not arguing for a socialist economy, but a mixed one.

I agree that decisions driven by producers interests are a problem. That is exactly what I think is going wrong with our current system.

Comment by lilac at 3:08 pm on 8 May 2007 at


Comment by Krsmanovic at 12:31 pm on 18 September 2008 at

Although I fully believe that the private ownership over the production factors, competition provide the most efficient outcomes, I’m wondering whether the private monopolies are better than the public monopolies. Namely monopolistic position is not OK from the any aspect, except from the monopolist side.
The consumers pay the price and inefficiency of both types of monopolies, in the case of public if not through prices for the services they provide we pay higher taxes (and thus compensate they inefficiency and sometimes lower prices that the market ones). However, on the other hand we pay higher prices for the services in the case of private monopolies.
For example in Montenegro state owned Telecom, which was by the way very profitable company, providing very cheap services, was privatized and turned from public into private monopoly. Prior to privatization company has introduced many new services. However, after privatization Montenegrin consumers face with constant price increase without increase in quality of service. This company has monopoly over the fixed telephony and internet, and these services are quite expensive and not so good. In the same time there are many complaints by the consumers on the bills that receive and many cases of fraud, but there is no higher instance to complain. If you go to the courts you can expect 1 to 10 years process, and then what…
It is obvious that there is no consumer protection policy in Montenegro, and we have impression that the monopolies can do whatever they want. Probably it is the same or similar with other countries.
Sometimes it seems that the state monopolies are less expansive, or the cost of these monopolies is indirect and better hidden.
But in the end, both private and public monopolies seem unfair and inefficient.

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