Why regulate monopoly in a free society? Competition is often cited as the good sought through monopoly regulation. However, economic competition is quite different from competition as generally understood. In a competitive market the competitors are manifold so the individual power of each is nonexistent. It is because no individual has power to affect the price of goods sold, that unregulated competitive markets in a free society operate without fear of wrongdoing.
Yet, when a monopoly amasses sufficient power to affect the price at which all may make transactions, they wield causality, and therefore may do wrong. As a matter of efficiency, consider the class of monopoly relevant to this merger: technical monopoly.
Perhaps the most persistently troubling incarnation of monopoly, technical monopoly develops when technical considerations specific to the market make it more efficient to have one firm rather than many. Ma Bell was a perfect example of the way the telephone network market fosters technical monopoly. With one network able to offer service, it would not be cost efficient to build a second network covering the same geographic area.
In the face of technical monopoly how might a free society act? Only three possibilities need be explored: government monopoly, government regulation of private monopoly and free private monopoly. As an example of the first, consider the U.S. Postal Service. Protected by law as the only firm allowed to deliver daily mail, its inefficiency demonstrates both the peril and the irreversibility of the creation of government monopoly. These government monopolies, although hopefully beneficently directed, will be very hard to effect once they are enshrined in legislation and assimilated into government bureaucracy.
Government regulation of private monopoly, the middle road, allows for the efficiency gains of privatization while purporting to maintain control to prevent the wrongful use of market power. However, this solution bears the same taint as all government regulation. The reward and punishment of private monopoly will become dependent both on political favor and public opinion; the only certainty being that the disparate treatments of these monopolies will all be brought about through the same governmental inefficiency.
What then is the fate of a free society which allows technical monopoly to operate without regulation? Private monopolies will furrow out efficiency gains in hopes of retaining them in the form of increased profit. Their ability to do so, however, will be limited. Should technical developments change the industry in such a way as to open it for competition, the unregulated market will react by ending the monopoly. Also, a monopoly's ability to maintain their prices above costs is limited by the ability and willingness of consumers to substitute other goods. By way of example, we should little fear a monopoly producer of bologna. Should he try to inflate his price it would be his downfall as consumers switched to other sandwich meats.
Without claiming any as the optimal solution, a free society may be guided by the principle: When regulating technical monopoly, assess the extent to which technical factors and substitutability actually give the monopolist pricing power, and regulate as to minimize the harm, caused either by monopoly or its regulation.
From this principle, what inferences about the AT&T-Bellsouth merger may we extract? It is instructive first to consider the motivation for the merger. While it may have been a bid for monopoly power, should it be the case that through substitution or from other firms (ostensibly Verizon) the market is still competitive, the merger will be profitable only if the new AT&T is greater than the sum of its parts. Should sufficient competition exist, consumers will likely receive a substantial part of the expected $18 billion in cost savings which will arise from the deal.
The permissibility of the merger then turns on the competition the new AT&T will face. First, and perhaps the most obvious competition is Verizon. Itself composed of baby bells, Verizon also owns a stake in Verizon Wireless which will compete with AT&T's Cingular.
While duopoly is marginally better than monopoly, it is the new arrival of alternative technologies which will provide stiff competition by offering a substitute for the previously monolithic land line. Cable companies are competing by now bundling data transmission as well as even a dial tone into their high speed offerings. Voice over IP (or VoIP) is now allowing consumers to choose from a number of competing firms who provide phone service through the Internet connection.
While substantial, these technical developments are accompanied equally significant cultural drivers. E-mail has, or is well on the way to, surpassing the telephone as the primary means to keep in touch for many consumers. Likewise, consumers are buying cell phones in greater numbers while decreasingly relying on a land line.
It seems clear that the new AT&T will wield insufficient market power, in the face of other dynamic forces, to be characterized as a monopoly. Further regulation, on the other hand, may squelch the pursuit of cost savings which free markets so neatly deliver. This analysis points to an important principle which is so often lost in the heated dialogue over the free market. While there is a tendency to label monopoly or even the corporation itself "wrong" we must only regulate in the face of a wrong, or a harm suffered. Corporations arise from mutually beneficial contracts between free individuals. An attempt to decipher in their association moral value independent of their actions violates the central tenant of a free society; that the liberty (including economic liberty) of its citizens should only be curtailed to prevent or punish a wrong.
McClellan can be reached at
chmcclellan@amherst.edu