Are monopolies always bad?

Very few people can compete with me in the matter of long names. One of them is Dr Venkataraman Anantha Nageswaran (known as VAN), financial economist, indefatigable writer, and a very incisive columnist. 

Recently, he noticed a research paper and an International Monetary fund (IMF) discussion — led by no less a person than Christian Lagarde, Managing Director of the IMF — on the increasing market power of corporate behemoths like Google, Facebook etc and its consequences for economies. He wrote about it here. No better summary on the subject exists so far. 

Then after watching the panel discussion on video he wrote: “I am still trying to wrap my head around what the panel moderator was trying to achieve... The session was neither about technology and its enabling role (or not) in market concentration; nor was it about market concentration in the technology sector itself and how both or either of them were leading to the new gilded age, or not. I still do not know what the session was about... When I mentioned this to a friend, he said that this was not a surprise and that there was a deliberate ‘conspiracy of silence’; in liberal establishments on the... challenges of the day and their perpetrators”.

He also referred to a blog post at the Bank of France website published in February. It asked if monopolies were a danger to the United States. VAN also wrote, “The blog post cites Luigi Zingales to make the point that even if large firms with their rising monopoly power are not cutting back on investment spending, it is important to understand that these investments are about”.

He then quotes Mr Zingales: “Investment can be misused to create barriers to entry...  The fact that the most profitable firms invest relatively little may corroborate this theory. Buying emerging startups to reduce competition is another example of the misuse of productive investment to maintain monopoly rents”. 

Ho-hum 

Let me add my two-bit to all this. Is competition always better than monopoly? Well, not always. Sometimes monopolies yield exactly the same results — higher output and lower prices. India, as always when it comes to contrarian economics, provides the proof.

Take the Indian Railways. It is a monopoly. Yet, it has constantly expanded its services and constantly charged below cost. What more can you want? Exactly the same is true of the state electricity boards and water boards. They are allmonopolies but far from reducing output, raising prices and making huge profits, they all do the opposite. 

Many people say that ownership makes a difference. Public sector monopolies can make infinite losses because they can rely on the exchequer. But so do public sector firms in competitive markets. Air India is a good example. 

Competition doesn’t always guarantee profits, either. In fact, as the aviation industry shows — and now the telecoms and media industries in India — the opposite is true.

There also used to be the ‘quality of service’ argument and the ‘efficiency of capital use’ argument. But look at any private sector operation today and efficiency is not the word that springs to mind, either for the customer or for the investor.

In fact, it can be shown how a monopoly can, and does, offer a wider range of products and services than would otherwise be the case when everyone fights for a share of the largest market segment. It’s called race to the bottom. 

I was taught this in my first year in college, in 1967. The example used was of the BBC which offered something for all listeners via its four channels. AIR was exactly the same but less market-sensitive.

Finally, those who think competition always yields socially optimal results also overlook the fact that it leads to huge capital wastage which capital-short countries can ill-afford. Sunk costs and large haircuts don’t go well.

Indeed, more than market structure, professional management is the key issue. 

The big question  

Are Google etc preventing competition? Maybe. I don’t know. But does it matter?

After all, the prices at which they provide their services can’t be lower than what they are because so many of the mass consumption ones are free. And as to restricting output, well, what can one say when one looks at the speed at which services have expanded and their range?

Let me conclude this by asking whether the monopolies serve large markets better than even small oligopolies. On the evidence before us, it does look like it.