Efficient Pricing of Monopoly Services

Efficient pricing of services means the lowest price for an equal quality service.

In market economies, a natural monopoly occurs when the most efficient number of firms in the industry is one. In human communities, the commons is the cultural and natural resources accessible to all members of a community, including natural materials such as air, water, and a habitable earth.

A natural monopoly becomes a Commons when all members of a community act as a single entity as though they were a single firm. By using Commons governance principles communities can create the most economically efficient way to provide natural monopoly services. This paper outlines the issues arising when market economics set prices in a monopoly market and then outlines how a Commons would set prices. Commons principles will always produce the most economically efficient outcome and typically halve the cost to a community of the same output of any resource.

Setting Prices with Market Economics

Traditionally regulators use market economic theory to price monopoly services. Market economic theory assumes there are many suppliers and many buyers. It assumes buyers and sellers have perfect knowledge. The “invisible hand” of the market works by buyers choosing the lowest-priced goods from suppliers. Suppliers price their products at what they think buyers will pay and buyers keep prices low by buying from low-priced sellers.

Regulators of monopoly markets set the maximum amount that monopoly suppliers can earn on their capital and set the maximum price they can charge for services.

In a competitive market, suppliers compete for customers and provide prices that are attractive to different customers. Typically this involves having a fixed price flag fall, subscription fee, or varying the unit price for goods delivered. Usually, the more product a customer buys, the lower the unit price.

In a market, suppliers try to get more customers and hence sales and so offer incentives for people to buy from them. Suppliers lock in customers with contracts and by making it inconvenient and difficult for customers to move and to choose.

Varying the price for different customers, buying customers, making moving inconvenient are all substantial costs associated with markets. Suppliers do not mind doing these things because their rewards in regulated markets often include a fixed return on Capital. The more product they can sell and the more Capital they spend, the higher their returns.

In particular, variable prices for different customers encourages overconsumption. Examples are:

  • A supplier has a fixed flag-fall that also includes a given amount of product. Many consumers will consume the given amount of product, whether they need the product or not.

Setting prices using Commons fair pricing

Regulators could set fair prices instead of setting a maximum price and a maximum return on investment. Fair prices are ones that everyone can understand are fair, and that is “on average” the lowest possible price to give the seller a fair return on investment. In the absence of perfect knowledge, a fixed price set by a trusted regulator is transparent and easily understood. Within a fair price system suppliers can gain more profits by lowering costs.

The simplest and least expensive way to set fair prices is to charge a fixed charge per unit of consumption. For monopoly services, it is both the least cost, and it results in a lower overall consumption in services as there are no systematic incentives for customers to consume more. Charging the same price to all customers for the same goods or service is simpler, costs less to operate, and makes it difficult for both suppliers and customers to game the system.

To set a fair return on investment we give suppliers a fixed return on the money invested. This encourages suppliers to produce more for the same amount of investment. To discourage excessive investment customers can get the first option to invest in new services.

Often, compared to market prices, a fair price may increase prices for high volume customers and advantage low volume customers. However, economic efficiency increases, so on average customers pay less for the product. The approach should be politically attractive as there are more low consumption customers than there are high consumption customers. It is transparent and seen to be fair.

The approach suggests that regulators set a maximum fixed unit price for goods and services in monopoly markets and give all consumers the same price. Regulators give investors a fixed return on investment. It means operators are incentivised to produce goods and services at lower prices.

Investment in Monopoly Services

Money is a monopoly service for the exchange of value. Governments either issue or are responsible for the issue of money and it has value because government promises to accept it as payment for taxes. Money takes its value because it is fungible and trusted. It is a derivative of goods and services and turning it from a derivative into a product to be bought and sold in money markets is costly. Money markets cost a lot to operate and there are other ways of distributing investment money than via markets.

The financial system, as distinct from the monetary system, is unnecessary. The gradual replacement of money markets will make for large gains in economic efficiency.

Money becomes a product for rent when we give it a value with the passing of time by allowing it to earn interest. Giving money the capacity to earn more money simply because it exists appears to make it easy to save and invest. Unfortunately, as with any monopoly product, the market in money is expensive to operate. However, money markets provide a mechanism to give savers of money a return on investment. We need another mechanism to give savers of money a return on investment.

One way of investing that gives a return on investment without giving investors more money is to give customers more product for the same amount of invested money. An easy and effective way to encourage investment is to allow customers to invest money in productive enterprises and give them priority in investment over others. Giving customers a fair return on their money means it is in their interests to invest the money wisely and provide a good return on investments in products they consume.

For monopoly products, a regulator can set a standard return on investment to customer investors with discounted products. Compared to investing through a money market, the new approach typically requires half the money, and hence half the cost, to provide the same value of goods or services.

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