Should we worry about monopoly? (updated)

The obvious answer that most people would give would give is yes, but that answer may be wrong.

Having a monopoly may not be a problem if that monopoly is contestable. The danger with monopolies isn't the monopoly as such, its the ability to exploit that monopoly that is the problem.

Writing over at the Forbes blog Tim Worstall makes this point with a couple of nice examples:

As I've pointed out before I had an effective monopoly on the global trading of scandium for a few years. And I didn't exploit it because I wasn't able to. Being a scandium dealer was just a matter of putting in a couple of month's work to find out who produced and who used and making sure you had their phone numbers. I wasn't able to therefore jack up my prices and wax fat off my monopoly--because what I had was an eminently contestable monopoly. Indeed people came along, contested it and I'm not in the field any more.

The important thing about monopolies therefore is not whether one exists. It's whether someone is trying to exploit it and if they are, can people contest that monopoly?

Take another such monopoly that people have worried about recently. In 2010 China started trying to exploit it's near monopoly of the production of rare earths. As I pointed out back then that was a contestable monopoly they had. Their throwing their weight around would lead to competition. As it did. China's monopoly was broken and prices are now well below what they were in 2010.

Tim notes that the recent decision by the European Union Commission to block a merger between the London Stock Exchange and Deutsche Boerse (German marketplace organizer for the trading of shares and other securities) was wrong because even if the merger did create a "de facto monopoly" in the clearing of bonds and fixed-income products, as the Commission claims, the important question is if the merged company tried to exploit their monopoly could competition to it arise? Would competitors be able to enter the market? If so there are no grounds to stop the merger.

Thus even if we see an increase in concentration in markets which looks like a move towards monopoly before we panic one question we have to ask is, is that monopoly one which could prevent entry into its market if it was to attempt to exploit its market power? If not then increased concentration is not as dangerous as it may look at first glance.

Update: In a related posting Levi Russell discusses Contestability theory in the real world [Ag-Biotech Symposium]