'Natural Monopoly,' or Your Economics Teacher Doesn't Know What He's Talking About

Stuart K. Hayashi

The vast majority of academic economists, including those at Hawaii Pacific University and the University of Hawai'i at Manoa, give long-winded lectures about how there are some industries where consumers are best served by a single firm without any competition. This is what they call "natural monopoly."

They tell their pupils that if there were competing cable-television providers in a community, for example, the costs of both firms would soar, waste resources, and lead to cable rates that are much higher than they would be if there were a cable TV monopoly. They offer this counterintuitive (and, frankly, counter-logical) explanation by saying that a cable monopoly would achieve economies of scale but that no firm would in a competitive cable market. The sole cable provider will not be able to "exercise monopoly power" to flee customers, the economists maintain, because the government regulates pricing.

Not only is this utter balderdash (as I have said before in a Hawaii Reporter op-ed), but it is yet another example of economists making assumptions without bothering to look at data from the real world, just as Nobel laureate Paul Samuelson wrote, in the world's bestselling economics textbook, that a privately owned lighthouse could never be built. The fact is that the first lighthouses ever built were privately owned. There are some privately-owned lighthouses even today.

By that same token, the economists are wrong about cable monopolies charging lower rates and giving better service than our hypothetical communities with competing cable companies. We know this because hypothetical cable competition isn't hypothetical at all -- it really exists in over 40 different communities across the United States.

Here is a list of communities with two competing cable providers -- Comcast and Wide Open West (WOW), along with their respective rates from the year 2002.

And here is a list of communities where Comcast has a government-enforced monopoly, along with the rates from the same year.

As you can see, the rates are consistently lower in the towns and cities with cable TV competition.

Observe that the cost-per-channel is $0.60 for both Highland Park and Wyandotte, but, because Highland Park has a monopoly, it charges a monthly rate of $42.95, while Wyandotte, which has competition, has average monthly cable rates of $26.95.

According to The Detroit News,

Residents in 78 of 120 communities in Wayne, Oakland and Macomb counties have just one choice for cable service and pay 10 percent more than their neighbors in communities with competition.

Imagine that. Not only can there be competitive markets for cable television (as there has been in some towns since 1996), but they work much better than communities where the economists' religious belief in "natural monopoly" is upheld by law.