Dissertation on Monopoly

Southern California Edison as a Monopoly: Analysis

This paper, by analyzing the company of Southern California Edison, illustrates what a monopoly is and why a monopoly can benefit the citizens of a particular state or a district.

In April 2001, California acquired the transmission system of Southern California Edison, the near- bankrupt power distribution company, for $2.75 billion, and obtained additional generating and transmission assets in the months that followed (www.sce.com). The State also created the California Consumer Power and Conservation Financing Authority to construct, own, and operate electric-power production and transmission facilities.

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It’s fair to say that the main result of the crisis, apparent by the fall of 2001, was the complete abandonment by the State of California of anything even remotely related to electric utility deregulation. The re-regulatory experiment was deemed a complete failure by state regulators, and especially Gov. Davis who stepped up his attacks on companies like Enron as he began his 2002 reelection campaign (www.sce.com). And that failure was taken as conclusive proof against the wisdom and value of deregulation in the future.

California ratepayers were paying electricity prices that were much higher than when the re-regulatory process began, and seemed destined to pay high prices for many years to come. Moreover, deregulatory efforts throughout the country were slowed, or even abandoned, in light of what was perceived to be failed deregulation in California. Simply put, the entire deregulatory enterprise was tainted by its dubious association with what passed for-but really was not-deregulation in California.

The history of a monopoly, which Southern California Edison is, dates long back to the beginning of the 20-th century. During the 1930s, a number of distinguished economists attempted to inject the concept of monopoly power into the conventional theory of the firm. These path-breaking efforts led by Chamberlin, Robinson, Lerner, Kaldor, and Kalecki provided valuable tools for economists investigating the behavior of particular firms and industries (Du Richard 1999). The version of monopoly theory that penetrated microeconomic textbooks is called the standard monopoly model. It is based on the assumption that the monopolist maximizes short-run profits and other firms hold their prices and output constant. The profit maximizing output, q*, is determined by the intersection of marginal cost (MC) and marginal revenue (MR). At this output, price is equal to p* and average costs are equal to AC*. Total profits are equivalent to the shaded area because both are equal to the product of average profit (p*--AC*) and total output, q* (Du Richard 1999).

The introduction of monopoly theory into mainstream economics was both a victory and a disappointment. It was a victory because it provided an alternative to the idealized theory of perfect competition. But it was also a disappointment because the conditions for the standard monopoly model were typically just as idealized and ambiguous as perfect competition. Where perfect competition required an infinite number of firms producing identical products, the monopoly model assumed a single producer in a market.

The key features of monopoly are:

1. The standard monopoly model defines only potential values. These are potential values because they are based on two assumptions that are not always met in the real world. The first is that firms maximize short-run profits and the second is that other firms hold their prices constant. Since firms do not always maximize short-run profits, nor do other firms always hold their prices constant, actual values may differ from those in the model. In order to make this clear, it is necessary to distinguish between potential values determined by the standard monopoly model and actual values determined in practice (Du Richard 1999).
2. These potential values can be calculated for any firm. Since a short-run demand curve and cost curves can be constructed for any firm, the “potential” values can also be calculated. The calculation can even be made for firms with flat demand curves, corresponding to the special case of perfect competition. The third proposition makes a connection between these theoretical values and real economic activity (Du Richard 1999).
3. These potential values influence actual behavior. This is the final and most important proposition. Monopoly theory would be of little value if it bore no resemblance to actual firm behavior. The fact that monopoly theory can describe and predict business behavior is what makes it a valuable theoretical tool (Du Richard 1999).

While monopoly power can improve the potential profitability of a company, it does not guarantee it. In order to discuss the relationship between monopoly power and profits, we need to introduce another concept, economic power. This term is defined as the maximum potential profit of a firm. Actual profit and economic power are equivalent only when the firm charges the particular price that maximizes short-run profits. At all other times, economic power merely describes the potential profitability of a firm. Economic power is measured in thousands of dollars for some firms and in billions of dollars for others and is yet another way to distinguish one business from the next.

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