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Legal monopoly

From Wikipedia, the free encyclopedia

A legal monopoly, statutory monopoly, or de jure monopoly is a monopoly that is protected by law from competition. A statutory monopoly may take the form of a government monopoly where the state owns the particular means of production or government-granted monopoly where a private interest is protected from competition such as being granted exclusive rights to offer a particular service in a specific region (e.g. patented inventions) while agreeing to have their policies and prices regulated.[1] This type of monopoly is usually contrasted with de facto monopoly which is a broad category for monopolies that are not created by government.

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One way we usually associate with government intervention or government activity is the regulation of monopolies. And we think of legislation like the Sherman Antitrust Act as a way that we control the growth of monopoly, market power, and the ability of firms to come to dominate one industry. The history of this kind of regulation teaches us a lot about the economic processes that drive innovation and economic activity and whether or not regulation in these natural monopoly situations actually provides value and makes consumers better off. Take for example the electricity industry. By the 1890s it’s really starting to grow, especially in large cities like New York and Chicago. Initially they were very rivalrous. A lot of firms entered the market to provide electric service in larger cities and competed against each other. The kinds of innovations that happened in this industry were on a big scale: large generators, lots of long wires connecting large generators, in places like Niagara Falls to cities like New York. That changed the cost structure of the industry. It changed the cost structure of the industry in a way that the electric company that owned this generator, their fixed cost was very, very high for building these big generators, but then their cost for serving an additional customer was really, really, really low. And so that meant that their average cost per unit of electricity they sold and their average cost per customer really fell and fell over the course of serving a large number of customers. In economics we call this economies of scale, and this economies of scale in the big technologies and industries like electricity really make it challenging to have rivalrous competition. In Chicago, for example, in the late 1890s there were about a dozen different firms providing electric service in the Chicago market, but, as they competed against each other they competed so much that they were lowering their prices, lowering their prices, lowering their prices until price would go so low that they couldn’t actually pay all of the fixed costs that they had incurred to build the generators in the first place. Not all of the companies could stay in the market. That process, over time, led to the consolidation of the electricity industry in cities like New York and Chicago into one large firm. That firm could, as a monopoly in that market, charge a high price to consumers. That was very much a part of the kind of public-interest motivation of regulation, this progressive era suspicion of large corporate activity, suspicion of large companies, and also the progressive era belief in the ability of government regulation to stand in for competition and correct the imperfections that they saw. There is also a more kind of public-choice motivation, looking at the incentives and the interests of both policymakers and the industry. They have an incentive to embrace regulation, because regulation constructs a legal entry barrier and says in a particular geographic territory, you will be the only firm allowed to provide retail electricity service to the people living in this area, and no one else is allowed to do that. In return for government protection of your monopoly power, we will regulate the profits that you earn on your assets, and in that process regulate the prices you can charge to consumers. And we’re going to shoot for trying to keep those prices at around average cost per unit of output to try to keep prices as low as are sustainable in the long run but still consistent with the firm investing in assets, entering a return on their assets. That’s the regulatory compromise, and that’s one reason why industry actually embraced regulation in electricity. One of the presumptions on which regulation is built in this industry is one of stability, that we have a static environment. And so, this is the cost structure in this industry, boom. This is what kinds of assets firms are going to build, boom. And so we can figure all that out and back out what the right profits are and what the prices are. The information required to get that right is, I would argue, unknowable. They just think, okay here’s this demand for electricity and we have to meet this demand. But now, especially with air conditioning, we see demand fluctuating dramatically over the course of the day. And yet we pay this fixed average retail price that gives us as individual consumers no incentive to change our consumption even at 5:00 when it’s 95 degrees out on an August afternoon. I would argue that today—here we are early in the 21st century—that now is when we’re really seeing the cost of regulation in terms of how it stifles innovation. I attribute this to a misunderstanding in the late 19th and early 20th century about what competitive processes actually entail and what drives them and what they create. And that’s where we are now is trying to deal with the fact that the regulatory system of the past century doesn’t address, hasn’t adapted to, hasn’t evolved along with the ways we use electricity, the new ways we may generate electricity, including renewables. It hasn’t evolved to take into account the growth of digital technologies that we can use to basically program and monitor our own electricity use and respond automatically to price changes. And so I think that where we are now is on the brink of recognizing the costs of regulation. We’ve focused so long on the benefits to consumers of having these low, stable, fixed prices and universal service. But now these low, stable, fixed prices are leading to a lot of electricity consumption in peak hours when it’s really expensive to provide it for us. And also the environmental concerns: it’s generating a lot of emissions in the process. So those are the 21st century challenges.

History

Jurisdictions have at various times imposed legal monopolies on various commodities, including salt, iron and tobacco. The English Statute of Monopolies of 1623 was an early step in an English movement to convert letters patent from a method of rewarding royal favourites at other than royal expense, to a method of encouraging inventors.

The British East India Company (1600), Dutch East India Company (1602), and similar national trading companies were granted exclusive trade rights by their respective national governments (monarchs). Private interlopers were subject to criminal penalties, and the companies fought wars in the 17th century to delineate and defend their monopoly territories.

Legal monopolies on alcohol remain commonplace, both as a source of public revenue and as a means of control, and the monopolies on opium and cocaine, formerly important for revenue, were converted or reinstituted during the twentieth century to curb the abuse of controlled substances. For example, Mallinckrodt Incorporated is the only legal supplier of cocaine in the United States.

The regulation of gambling in many places includes an official monopoly national lottery or state lottery. Where private operation is allowed, for example in horse racing, off-track betting and casinos, the authorities may license only one operator.

The early 19th century Gibbons v. Ogden case weakened the steamboat monopoly that New York had granted, producing an exception for interstate commerce. However the later Slaughter-House Cases established that a local law creating a legal monopoly did not violate the rights of other merchants in the United States.

The National Recovery Act to promote and legally enforce producer cartels was defeated in Schechter Poultry Corp. v. United States.

In the middle twentieth century many countries established a monopoly broadcasting agency, such as BBC, Radiodiffusion-Télévision Française, or RAI. Most large countries relaxed their law or privatized their state broadcaster late in the century.

In parts of the United States, AT&T had a legal monopoly on the provision of local telephone service and in long distance until 1984 when local service was vertically divested. The divested local companies continued to be protected in lesser degree from competition in the local exchange market as a public utility.

National Postal, telegraph and telephone service monopolies were enforced in many countries until the late 20th century. Telstra, for example, had a legal monopoly on telecommunications in Australia.

As do the Post Office departments in many countries, the United States Postal Service has a legal monopoly on delivery of non-overnight letters.[citation needed]

In many cities bus service enjoys a legal monopoly, however some city governments have legalized bus competition due to pressure from consumers who desire lower prices and entrepreneurs that would like to provide them.

Professional sports organizations such as Major League Baseball are not legally protected from independent league baseball, but nonetheless are sometimes called legal monopolies on grounds that they are exempted from US antitrust law.

Professional licensure as of Professional Engineers in the United States or Chartered Accountants in the United Kingdom, does not limit the number of practitioners to one, but detractors sometimes call the system a legal monopoly anyway.

The creation of Sirius XM Radio by merger left the United States with only one licensed satellite radio broadcasting company. However, the United States Department of Justice decided that this was not harmful to competition, due to the presence of terrestrial broadcasters.

See also

References

  1. ^ investorwords.com definition
This page was last edited on 16 November 2022, at 01:23
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