Friday, May 22, 2009

Monopoly power horror

This caught my eye in the news today, from the NZ Herald:
The Commerce Commission released its long-awaited report into the electricity market.
It concluded each of the four big generators - Meridian, Contact, Genesis and Mighty River - has been exercising the power the market's design gives them to command unjustifiably high prices, at least during years when inflows to the hydro lakes are low as they were in 2001, 2003 and 2006.
But this did not amount to a breach of the Commerce Act, the commission said. It was a lawful and rational exploitation of the opportunities the market gave generators and they would not be hauled before a court. [...]
Residential power prices rose by two-thirds between 2000 and 2007, or 5 per cent a year faster than general inflation
It would be easy to substitute the company names with the company that holds a monopoly position on the Auckland - Waiheke run, and come to the exact same conclusion - which the Commerce Commission actually did when asked about monopoly practices by Fullers a few months ago, giving it a clean bill of health since "it was a lawful and rational exploitation of the opportunities the market gave" Fullers.
And it is interesting to see that monopoly pricing behaviour is following a general pattern: that sweet spot you are striving towards as a company when you can charge more than general inflation.
To quote Milton Friedman (lest you want to accuse me of leftwing bias):
Monopoly implies absence of alternatives and thereby inhibits freedom of exchange. Monopolies exist because of failure to create a "real" free market, because of "market inefficiency". Dynamic changes are highly likely to undermine monopoly and there is at least some chance that these will be allowed to have their effect."

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