Local monopolies and oligopolies
Some oligopolies take the form of local monopolies. In these industries, there may be, in general, lots of participants. But because of either the physical nature of the delivery (utilities) or the rewards of surviving a to-the-death market struggle (newspapers), companies can avoid competition through local dominance.
Local monopolies are still a pretty rare phenomenon, outside of the natural (network-dependent) ones, and most of these are embattled due to changes in the competition grid. Of course, small towns and rural areas are subject to local monopolies, where. for example, Wal-Mart is the only store within driving distance that sells a number of items, or where there is just one local bank or gas station.
Examples:
- Water delivery is a natural local monopoly. For those who do not have their own wells, there can be only one pipeline in one area, one network to which customers can be attached. Traditionally, the local monopoly has been a function of local government, and, in many cases, it still is. A municipal water department or an area water commission takes acre of sourcing the water, treating it, maintaining pipeline, and metering water use. (The same group is often in charge of sewage removal and treatment.) But in recent years, private companies have started buying up local and regional water systems, and running them as for-profit businesses. This is now a $300 billion business worldwide, and the water systems of such American cities as Atlanta, San Francisco, New Orleans, and Indianapolis, among others, have been either fully or partly privatized.
- Electricity is another industry that lends itself naturally to local monopolies. Normally, electrical companies generate or buy the electricity, maintain the grid, and bill the customers. As with water, large companies have started consolidating these more localized monopolies into private, national companies. In 1999, the US passed the Comprehensive Electricity Competition Act, which allowed other energy generators to gain access to the electric companies grid, giving consumers the right to choose between electric generators, if not delivery service. So far, few consumers have even understood the option, let alone adopted it. Most electric companies still maintain local monopolies.
- The telephone industry used to be a simple monopoly in most parts of the US, as in many countries. After the 1984 forced breakup of AT&T, a set of local monopolies (at least for local phone service) developed, while real competition for long distance was fostered. Over time the local regional Bell companies started merging, and they gained the ability to host long distance in return for allowing some competition for local calling, using the local telco infrastructure. Growth in local competition is still pretty sluggish. On the other hand, the change in the competition matrix (cell phones, VOIP) threatens the local monopolies.
- Cable television is another natural local monopoly, where the creation and maintenance of the infrastructure calls for such a structure. There's been lots of consolidation in the industry, as smaller local companies have been bought out. The biggest threat to cable companies is satellite TV companies that bypass the network, but that's still only 10% of the market,
- Natural gas is dependent on a delivery grid, and so is subject to local monopolies that bring the gas from pipelines to the home. While natural gas is in some ways like water and electricity, it does have major competition from heating oil, a competitor distributed easily by many competitors.
- Newspapers are local monopolies that are not based on physical advantages, but are historical artifacts. Instead of two or three daily newspapers as in even recent times, most American cities now have only one. In some cases, like Philadelphia, there are two daily papers owned by the same company. True two newspaper towns like Chicago get scarcer every year. The newspaper local monopolies control advertising access for local businesses. True there are other advertising media, but for many businesses (department stores, grocery stores, movie theaters), there is really no substitute. And that's why, in spite of declining readership, newspaper advertising rates keep going up and many newspapers report excellent profits. As with other local monopolies, newspapers have formed into chain oligopolies on a national level.
- We've written about how national funeral home companies have built up local monopolies.
That's an issue deal with in the book, American Way of Death Revisited (2002), Jessica Mitford's update to her classic book on the funeral industry. In many towns and small cities, all the funeral homes are branches of the same company. And they have similar rates and policies.
- Railroads generally have local monopolies of the cities they serve. This did not used to be the case, but since the rollup of the US rail network into a tight oligopoly of four major players, a smaller number of regions are served by more than one railway. Companies that need to ship freight do have other alternatives, however, notably trucking. But for certain bulk items (coal, for example) the economics of delivery by truck are prohibitive.
Most government services, of course, are local monopolies. Public schools, police, fire protection, and sometimes trash collection might be considered local monopolies. There is constant pressure to privatize these functions, and there are alternatives. Companies hire security forces, arrange their own garbage disposal, and individuals choose private schools.
Most local monopolies, unlike many oligopolies, tend to be closely regulated, since they directly impinge on public safety and welfare. But here again, the advantages of oligopolies come into play. Local monopolies, if they have real financial muscle, can influence how they are regulated. While there are political limits to how much individual consumers can be charged (for instance rate hikes), oligopolies can impact the way in which their costs are structured and how strictly their quality is checked. That's not to say that they can afford major service breakdowns and major liability, but rather that they can better cooperation from local authorities or at least blunt active opposition and over-close oversight.
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