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.