The ‘natural monopoly’ idea is a myth that seldom survives ten minutes’ critical thinking, because of technological change (when there are no politically-imposed constraints).
It’s true that large-scale networks — for electricity, transportation (railroads, especially) and telephony — are the standard undergraduate pedagogical examples of production processes where the MES (minimum efficient scale) is 1 … and these things are therefore declared to be ‘natural monopolies’. Thankfully, there is plenty more to study after undergraduate.
So it always turns out that once the ‘natural monopoly’ network is built, it requires regulatory protection from competitors.
In other words, the service that putatively yields external benefits (which justifies government intervention to expand the output in that market) also yields sufficient return on capital to attract new entrants.
Odd, that — because monopoly pricing always results in losses if factor markets are competitive (do the ‘math’ as Americans say: if you pay all factors their marginal value product, you more-than-exhaust total revenue under monopoly: that’s why genuine monopolies require a two-part tariff).
So anyhow… the government press release usually goes
“The citizens of X will be far better off if they have thing Y, but — alas, woe and lack-a-day — Y is a ‘natural monopoly’… so it is essential that taxpayers fund its construction. Then, to avoid the inefficiencies of public sector management, it will be handed over to consortium Z through a PPP or BOOT.”
That’s the press release: sounds great, and the schlubs think “Wow, these politicians are forward thinkers: here was I thinking that they were parasitic scum who should be ground up and fed to pigs.”
In reality it turns out that the BOOT/PPP will grant an artificial monopoly through clauses that ensure that firm Z earns an above-normal rate of return for the life of the project (not just for the length of time that thing Y is a ‘natural monopoly’). [Disclosure: my partner helped write the contract for Victoria’s toll roads when she was a solicitor — she’s since been called to the Bar].
Broadband cable networks (and telephony networks in general) are a good case in point: most of the West had government-built and operated (or government built, privately-operated; or government-subsidised) landline networks that dated from the first half of the 20th century.
By stark contrast, much of Africa has ‘leap-frogged’ the copper phase of landline networks and jumped straight to mobile — saving vast build costs, with the added advantage of a broader menu of alternatives when deciding on broadband (and within 5 years all first-rate broadband will be mobile).
In the West we have had to try to shoe-horn broadband onto the ‘legacy’ copper network — which constrains both speed and capacity — as a putative ‘intermediate step’ prior to wide-scale fibre-optic/gigabit cable (which itself is already outdated as a technology).
But — and here’s the kicker — the old tech is a perfect thing on which to build a ‘Grand Scheme’ in order to transfer vast wodges of money to cronies.
I live in Australia, where the political vermin declared that they were going to embark upon a Grand Scheme to furnish high(ish)-speed internet across one of the emptiest Western countries on Earth.
The name: NBN. The claimed product: 100mbps fibre to the home. The claimed cost: $50bn.
So because of the clear-eyed visionaries of the political class, everyone would be downloading their porn at rates that would make your eyes bleed: Australia would, by 2021, have internet speeds as fast as South Korea had in 2007. (Note: at the time, our household had 17mbps ADSL).
Anyone in 2007 who had half a brain, immediately did the sums on the speed difference going backwards 14 years (i.e., to 1993 and 56kbps dialup) and realised that this Grand Scheme was a scam that would be overtaken by as-yet-unknown technologies. By 2021, 100mbps would, in all likelihood, be the internet equivalent of a buggy-whip.
As I wrote at the time: the NBN would cost $200bn (and/or the final product would be a shadow of what was being claimed); it would be delivered several years later than claimed; and — most importantly — it would be obsolete before it was completed.
The last leg of that forecast was proved true less than half way through the project, when Terabit/sec transfer speeds were achieved over a newer type of fibre. A further 3 years on, 5G mobile was tested at ~60x faster than DSL (and more than a dozen times faster than T3).
And meanwhile, the promise of 100mbps was replaced by a promise of 25mbps.
More recently, the consortium in charge of this white elephant declared that nobody wanted 25mbps (imagine having the chutzpah to make that claim, given that your firm’s reason for existing is to increase internet speeds).
So now, for our $70bn (so far — and it’s less than half-finished), Australia is slated to have a shabby mélange of technologies: less than 10% of the population will have full fibre, and a very large number of households that are connected to this shibboleth are finding that their speeds are slower than the existing technology.
All this, for the princely sum of ~$7000 per household before a single byte of data is downloaded.
That’s (roughly) 20 years’ worth of our current $59 unlimited ADSL subscription (at 25mbps) — and the ‘new’ NBN is not even available in our area (which is less than 5km from the CBD in the second-largest city in Australia).
But… and here’s the kicker: once the ‘NBN’ is finished, it will be a legislated monopoly. Nobody will be able to get a home telephone or home internet, without going through that firm. Fortunately it will take so long to finish, and cost so much, that it will be a poor alternative to mobile internet by the time that choice is foisted upon the peons.
All ‘major projects’ are boondoggles: they are mechanisms by which vast amounts of money are transferred to politically-connected firms. Any actual service delivery or fitness for purpose of the output is ancillary (and subject to downward revision from the ‘blue sky’ of the original press release). Every time you get an inkling that this-or-that thing requires government intervention, just remind yourself of the F35.
There’s a reason that politicians have to make their living by deceit, fraud and force: they are, to a man, second- and third-quintile talent. If they were genuinely able to “look into the seeds of time, and tell which grain will grow and which will not” (i.e., pick technology winners) they would be running hedge funds and earning billions.
