Good and bad monopolies: the case of Coca-Cola (or Red Bull)

In this series of short posts I give you my personal opinion (as it is at the moment) and my reasons for this opinion about how good or bad I believe different monopolies to be. I am planning six mini-case studies of monopolies. When I talk about a monopoly in this post I simply mean a firm that has some power over its price: it can choose a lower price and sell a bit more (but not super much more) or a higher price and sell a bit less (but not super much less). A firm with such a power will typically – see a previous post – choose a higher price and sell less than would be Pareto-efficient. And this way such a firm will typically make “abnormally” high profits. While all this is probably true in all six cases, I am, for various reasons, in fact not equally worried about every one of these. I want to discuss the following six “monopoly” cases: Coca-Cola (or Red Bull), Google, Facebook, Scientific Publishers such as Elsevier (possibly also publishers of €100 textbooks such as Pearson), the OPEC cartel of a set of oil producers, and pharmaceutical companies (such as Novartis). This one is about Coca-Cola, and applies equally to Red Bull.

I believe it is true that Coca-Cola and Red Bull have monopoly power. As we said this means that they do not produce and sell “enough” of their product. Actually in this case, however, I am in fact pretty happy that they sell less than what, supposedly, they could be selling of their product. Why? I don’t think it is actually such a good idea for people to drink these drinks. They don’t strike me as very healthy. In fact I do not allow my kids to drink them (as far as I can).

So what I am really saying here is that I think people have the “wrong” preferences and that’s why a Pareto-inefficiency assessment based on “wrong” preferences does not worry me. If I impose my personal assessment of this on others – in short I am being paternalistic – I would then probably like people to drink even less of these drinks than the supposedly low monopoly quantity. Given my personal assessment I thus may have a problem with these drinks companies but not because of their monopoly status. I might not like the fact that Coca-Cola and Red Bull – I do like their adverts, though 😉 – make so much money with their products, as, in my mind, they prey on the foolishness (or myopia) of people. But I rather have that they make lots of money selling at high prices to a “few” people than almost no money selling at low prices to many more people. So I would personally certainly not advocate a more competitive market in this industry. Unless that is more competition in this industry would lead to people starting to drink water. But that seems unlikely.

3 thoughts on “Good and bad monopolies: the case of Coca-Cola (or Red Bull)

  1. Pingback: Good and bad monopolies: the case of Google | Graz Economics Blog

  2. You’re making a good point which could be made more generally: Whenever there are negative externalities, a monopoly will often better approximate the socially optimal solution than the perfectly competitive equilibrium.

    However, I should like to point out that monopolies even under the conventional definition (1 supplier) are not necessarily inefficient. The inefficiency of the monopoly solution as shown in many textbooks critically depends on the assumption of no-price-discrimination. A monopoly with perfect price discrimination supplies the optimal output.

    And what’s the evidence that Coca-Cola is enormously profitable? At least when judged by readily available stats such as the return on equity (around 25% during the past 5 years) they’re not doing better than the beverage-industry average.

    Beverage Industry:

    • 1) my argument was not based on the existence of externalities. true, one could also argue, although i don’t see it as being of first order importance, that drinking coca-cola imposes a negative externality on others. the argument would be that, if drinking coca-cola is unhealthy, then coca-cola drinkers might require more services from the health sector, and as they do not pay any particular coca-cola related extra health insurance premium, we all somewhat pay for their health treatments. for me this is not the key issue. i simply would like other people to be healthier for their own sake, i think that other people are deluding themselves with their displayed “preferences” for coca-cola (over say water). they should prefer water over coca-cola. as i said i am being paternalistic and maybe i shouldn’t be. but, given this, i am happy if coca cola sells their stuff at high prices (they certainly much higher than the cost of production) and thereby sell less than they could.
      2) true. price discrimination can lead to Pareto-efficient allocations. but i can’t see how coca-cola can really price discriminate that much. aren’t we all paying more or less the same price for one bottle of coke in the supermarket? or are people who value coke less offered a lower price somewhere? i am sure that there is a bit of price discrimination, but nowhere near enough to make the coke allocation Pareto-efficient.
      3) well, all these companies have some monopoly power in the sense that they can be price setters. i guess they are all in monopolistic competition with each other in some way. the way they compete is, however, not so much through prices, but through advertising. i am pretty sure that the typical price of a can of coke is many times the cost of producing one. so they spend most of their revenue on adverts. as i tend to like these adverts i am ok with that.

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