Melberg, Hans O., A Good Monopoly

_{[Note for bibliographic reference: Melberg, Hans O. (1996), A Good Monopoly: An
anecdote about lukewarm showers and market structures, http://www.oocities.org/hmelberg/papers/960823.htm]

A Good Monopoly

An anecdote about lukewarm showers and market structures

by Hans O. Melberg

Monopolies are bad. They charge too high prices, and they do not have much incentive to
improve their efficiency, because of the lack of competition. True, there are some
exceptions. Schumpeter argued that monopolies could be good because they allowed the owner
to make enough money to invest heavily in research which in turn produced innovations
which were beneficial to the customers. Furthermore, Baumol's theory of contestable
markets shows that monopolies may sometimes be forced by the threat of potential (not
actual) competition to behave as if they were in a competitive market. In this short
observations I would like to present yet another argument which shows that monopolies may
sometimes be a good thing.

Before I go on I should add two qualifications. First, I do not support the creation of
monopolies in general. Second, the argument presented below is build on A. Hirschman's
book "Exit, Voice and Loyalty." I only present an empirical example of his
argument i.e. the ideas are not my own.

In order to explain the theory, I would like to give the reader a small anecdote. During
the past summer I have been working at a campground. Not only was I working there, I had
to live there and use the same facilities that the tourists used. One of the first things
I noticed was that the water in the shower was only lukewarm. Even worse, it varied a lot
- sometimes cold, sometime lukewarm. You might imagine my feeling: Two months of cold
showers - not a very pleasant prospect. Luckily, since I was in charge, I did not have to
put up with the cold showers. I called the plumber and told him to fix the problem which
he did. Well - you might respond - so what?

The point about this anecdote is that it illustrates that monopolies may sometimes be
good. Assume I had had my own personal shower with hot water. In that case I would be more
reluctant to use money on fixing the lukewarm water. To the tourists I might simply say
that this is a campground - not everything is perfect - take it or leave it (a bit more
polite of course). After all it was better than cold water and it was possible to get a
shower even if it was not very comfortable. However, the point is that since there was a
monopoly (i.e. only one type of showers for all - including me) it was very much in my own
personal interest to solve the problem. Hence, the though: Sometimes a monopoly is a good
thing.

The structure of the situation is very much the same used by Hirschman in his book. For
example, he argues that sometimes a monopoly railroad might be better than having several
railroad companies. The reason, he argues, is that with one railroad the elite would be
forced to maintain a certain minimum standard since they themselves might have to use the
railroad.

The point made above should not be exaggerated since there are many qualifications. In
fact, in my own example a duopoly might be better as long as it was a competing duopoly
(i.e. people could choose between two different places in which to take their showers). In
order for my argument to work, there has to be a number of market failures - such as the
second shower place having only a limited number of showers and in addition that I had
privileged access to the good showers. In such a situation a monopoly could be better than
a duopoly, but not in general.

Hence, I have given one empirical example of an exception - that monopolies may be good -
not of the rule - that monopolies are bad. Anyway, it may be useful to have a concrete,
real-life example and not only a theory to prove the exception.

_{[Note for bibliographic reference: Melberg, Hans O. (1996), A Good Monopoly: An
anecdote about lukewarm showers and market structures, http://www.oocities.org/hmelberg/papers/960823.htm]}}