Before considering government regulation of monopolies, Prof. Lynne Kiesling encourages us to think about the regulation that markets naturally provide. In any market, in the absence of government interference, each business is constrained by the following:
1. Consumer demand
2. The availability of substitutes
3. The entry, or threat of entry, of new firms
Historically, despite these competitive pressures, people have identified what they feel are monopolies in markets. In order to fix the problem, they often advocate government regulation in the form of breaking up large firms or regulating profits. Although these regulations may have merits, they reduce the profit motive that lures the innovators to come in and compete against the monopoly. Additionally, government regulations often create legal barriers to entry, which crushes smaller competitors.
The good news is that markets, on top of naturally regulating monopolies, generate wealth and technologies that systemically reduce the cost of starting new ventures over time. This, in turn, increases the competitive pressures on larger firms and reduces the likelihood of monopoly.
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Prof. Lynne Kiesling discusses the history of regulating electricity monopolies in America. Conventionally, most people view regulation of monopoly, such as the Sherman Antitrust Act, as one of government’s core responsibilities. Kiesling challenges this notion, and finds that government regulation of monopoly actually stifles innovation and hurts consumers.
The American electricity industry was booming in the 1890s, with several small firms competing against one another. Over time, Kiesling argues that the fixed costs began to escalate, increasing the cost of entry into the industry. Put another way, large competitors gained a significant competitive edge over smaller competitors through economies of scale. Eventually, in places like New York and Chicago, Kiesling claims that the competitive process led to one large firm.
These monopolies were feared by the public, and led to demands for government regulation. The electricity industry, knowing that regulation was coming, used these demands for regulation as cover to construct legal barriers to entry. Ultimately, the regulations passed by the government reduced competition by granting legal monopoly privileges to powerful firms within a certain geographical territory.
In modern times, we are seeing the real cost of these old one-size-fits-all regulations:
1) People aren’t adjusting their energy consumption behaviors. For instance, in peak hours, technological solutions that could smooth electricity consumption are being ignored.
2) The electricity industry doesn’t evolve and account for new types of renewable energy.
3) Innovations have been discouraged.
If these archaic regulations were removed, innovations and improvements beneficial to consumers would flourish.
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According to Professor James Otteson, one of the greatest challenges often presented against individual liberty and free markets is that they are atomizing. Essentially, it is claimed that people within a commercial society begin to view one another as competitors. This critique goes as far back as at least Karl Marx.
Although there is some truth to this, what is often overlooked by these critics is the enormous amount of social cooperation that takes place within a commercial society. For instance, a raggedy old wool coat may seem simple enough, but bringing that coat to the market required countless individuals to cooperate with one another. It required people to raise and take care of sheep, harvest wool, transform wool into a usable material, dye material, cut material, sew material into a coat, and transport the coat to market. Each one of these steps required social cooperation and tools made by other people. This insight goes as far back as at least Adam Smith.
Bringing this insight into the 21st century, with all the goods and services that are available to us, you can begin to see the massive amount of social cooperation that takes place in a modern commercial society.
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Archived from the live Mises.tv broadcast, this lecture by Tom DiLorenzo was presented at the 2011 Mises University in Auburn, Alabama. Includes an introduction by Mark Thornton.