A feature favoring the growth of monopoly when such industries are left to private enterprise, is the need to produce and supply the utility at a given locality. While two street-railways can compete on neighboring streets, it is physically impossible for two or more to compete on the same street. Two systems of water-mains or gas-mains can be put down, as sometimes is done, but this is not only a great economic waste, but the tearing up of the streets is an intolerable public nuisance. This difficulty is less marked in the case of telephones and electric lighting, and some persons still cling to faith in competition to regulate the rates in those industries; but faith in competition between water-companies and between gas-companies has been given up by nearly all students of the subject.
Gains from large production favor monopoly
4. A second feature favoring monopoly in such industries is the marked advantage of large production in them. These industries are usually spoken of as "industries of increasing returns." This advantage is enjoyed in some degree by every enterprise, but it is gradually neutralized and limited (as has been noted elsewhere). The need to extend an expensive physical plant to every point where customers are to be served, and the very much smaller cost per unit of delivering large amounts of water, gas, electricity, transportation, etc., on the same street, offered a greater inducement for one competitor to crowd out or buy out the other at a more than liberal price. Even then, larger net dividends and correspondingly larger capitalization are secured than were before possible to both companies combined.
Uniformity of products favors monopoly
5. A third feature favoring monopoly is uniformity in the quality of the product furnished. It is a general truth that competition is most persistent where there is the greatest range of choice open to the customer, and consequently the most individual treatment required in the enterpriser. An artist, even a storekeeper, attracts about him a body of patrons who like his product (for the merchant's manner and method of dealing are a part of the quality of his goods), and who cannot be tempted away by slight differences in price. Rival companies in the stage of competition are seen to claim superiority for their particular goods and to improve their service in every way possible. A new telephone company, entering where a monopoly has held the field, works at once a wonderful betterment in rates, courtesy, and service. But as the product of all competitors attains the highest technical standard possible at the time, the rivalry is reduced to one of price, and it is usually a "fight to the finish."
Franchises favor monopoly
6. A fourth feature favoring monopoly in these enterprises is the necessity of making permanent and exceptional use of the public streets and alleys. If this right were granted by a general law to every citizen, this feature would be sufficiently implied in the foregoing discussion. As it would be intolerable to allow private interests to use public property in whatever way they wished, the legislative body makes special grants in such cases in view of the circumstances. Not only is the legislature (or council, or county board of commissioners, etc.) induced by the economic difficulties to withhold a charter to a second company, but it is exposed to the greatest corrupting influences by the one already established. The knowledge of the opposition to be encountered in getting a franchise must keep competitors out, even though monopoly prices are maintained.
In view of these several features, which are so closely related that they form a common character, more or less fully shared by various industries, and especially in view of the necessity for the formal granting to them of peculiar privileges in the form of a public franchise, the public, in order to protect the general interest, is forced to undertake an exceptional control of these industries.
Modes of controlling public utilities
7. Several courses are open to the public, acting in its political capacity, to retain these monopoly advantages for the general welfare. First, it may do nothing, trusting vainly to competition to regulate the rate, or consciously leaving the result to be worked out by the monopoly principle; this is what in most cases has been done in the past in America. Second, in granting the franchise it may attempt to fix near cost the charge for the service or product, so that the franchise will be worth little or nothing. Third, it may leave the rate to be fixed by the monopoly principle, but charge for the franchise so much that the value of the monopoly is appropriated into the public treasury. Fourth, it may have public officials carry on the business, either selling the product at cost or making monopoly profits that go into the public treasury. Various combinations of these plans are followed in practice, the most common plan being the fixing of maximum rates which, with improved methods, generally become ineffective. It is difficult to fix a uniform rate that is equitable, because conditions change, and, further, because a uniform rate must be applied to all parts of the town, although the cost of service varies greatly. It is difficult to sell the franchise for near what it is worth, because of the uncertainty, of the political blackmail, and of the limited number of competent bidders. There remains only the policy of public ownership to secure the profits of monopoly to the public, either directly or in a diffused manner.