The Natural-Monopoly Myth: Electric Utilities
According to natural-monopoly theory, competition cannot persist in the electric-utility industry. But the theory is contradicted by the fact that competition has in fact persisted for decades in dozens of US cities. Economist Walter J. Primeaux has studied electric utility competition for more than 20 years. In his 1986 book, Direct Utility Competition: The Natural Monopoly Myth, he concludes that in those cities where there is direct competition in the electric utility industries.
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How "Natural" Were the Early Natural Monopolies?
There is no evidence at all that at the outset of public-utility regulation there existed any such phenomenon as a "natural monopoly." As Harold Demsetz has pointed out:
Six electric light companies were organized in the one year of 1887 in New York City. Forty-five electric light enterprises had the legal right to operate in Chicago in 1907. Prior to 1895, Duluth, Minnesota, was served by five electric lighting companies, and Scranton, Pennsylvania, had four in 1906. … During the latter part of the 19th century, competition was the usual situation in the gas industry in this country. Before 1884, six competing companies were operating in New York City … competition was common and especially persistent in the telephone industry … Baltimore, Chicago, Cleveland, Columbus, Detroit, Kansas City, Minneapolis, Philadelphia, Pittsburgh, and St. Louis, among the larger cities, had at least two telephone services in 1905.14
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