Chief of Police of Malibu

Today I read an opinion piece in the San Francisco Chronicle criticizing the re-emergence of telecommunications monopolies in the United States.  Specifically, AT&T’s purchase of SBC and apparently imminent purchase of BellSouth looks to the author like a rebirth of the Ma Bell monopoly from the middle of the 20th century.  The author, Mark Cooper, the director of research at the Consumer Federation of America, sounds like he’s against monopolies, no matter what.

Is that a reasonable stance?  My view of monopolies has been shaped by my understanding of two concepts of economics, and perhaps I could get some responses to my suspicion that a purely anti-monopolistic standpoint is not very reasonable.  The two concepts are Economies of Scale (or Increasing Returns to Scale) and Diseconomies of Scale (or Diminishing Returns to Scale).  As I understand it, an industry or product is characterized by Economies of Scale when the larger scale the production is, the lower the cost per unit (ad infinitum?).  The implication of this is that the most efficient production is achieved if a single firm produces the entire supply for an economy.  Of course, the moral hazard of a single company invulnerable to competition supplying the entire market necessitates some kind of protection for the public, usually in the form of strict government regulation or even government ownership.  Many European countries’ rail transit systems operate on this theory, and until recently many developing countries’ telecommunications systems did as well.  In America, the US Postal Service provides one of the few last vestiges of this idea (inroads from private parcel services, which do not generally impact the market for envelope-sized letters notwithstanding).  Water provision, air traffic control, power grid management, and fire protection in the United States also operate pretty much according to this principle that some sectors are characterized by Economies of Scale to the degree that they are Natural Monoplies.  Could it be that telephony also is a natural monopoly?

The other concept, Diseconomies of Scale, is apparently the opposite of the first–the idea that the more you produce of something, the more expensive each unit is to make (increasing marginal cost).  The explanation of this usually has to do with increasing bureaucratization, multiplying levels of overhead costs, and the complexity of organizing production efficiently on a larger and larger scale.  If Diseconomies of Scale characterize a given sector, then the implication is that the smaller scale the production, the more efficient it will be.  Restaurants, dry-cleaners, graphic design, auto repair shops, and other services where national chains are seen as providing low cost only at unacceptably low quality (or where national chains don’t seem to be viable at all) are potential examples of Diseconomies of Scale.  If Diseconomies of Scale prevail in a given industry, then any attempts at consolidation should not only be suspect of reducing competition, but also of reducing efficiency in terms of production costs.  If Diseconomies of Scale prevail in telecoms, then AT&T’s actions are not economically rational, and perhaps should be questioned on that basis (though not a legal question), even before legal questions about reduction in competition.

The amazing thing about these two concepts, though, is that they seem to suggest either of two business models that are increasingly rare in America today: a government-regulated (or owned) national monopoly, or a small business with a few employees and perhaps a single or a handful of owners.  If these two economic concepts are realistic, why is more and more of our economy taken up by mega-corporations that are so far from "small business" as to practically resemble government bureaucracies (I have to make a customer service call to Bank of America this morning–I’m dreading it!)?  Many corporations are so big (especially in certain areas) as to practically resemble national monopolies, and yet if economies of scale prevails in such industries–if they really are Natural Monopolies–then why is there so little concern about the moral hazard of private individuals getting a near-monopoly the given industry?  Do our nation’s political and economic leaders simply not believe in the basic tenets of the economic theories that underlie market capitalism?  Or is there something wrong with economics that its theories of efficiency do not reflect reality?