=economics
Suppose some companies produce a
commodity X. Because of economies of scales and institutional knowledge
requirements, only a few firms produce X. Suppose demand for X is relatively
inelastic, and has some random variation.
Most of the time,
competition between firms keeps the price of X near the cost of its
production, but sometimes the demand randomly exceeds supply, and that's
when these firms make most of their profits. Every little bit of extra
production significantly reduces the amount that happens, so firms already
producing X have a disincentive to increase production capacity, and new
entrants face significant barriers to entry.
In some cases,
governments decide to have a single regulated monopoly handle something such
as electric power distribution. However, while an oligopoly produces some
economic inefficiency, that inefficiency can be smaller than the
inefficiency of government operation.
So far, our model has an
oligopoly producing X, with a small underinvestment in production capacity.
What happens if we add a step 2, where an oligopoly converts X to Y?
The step 2 firms will slightly underinvest in production capacity for Y for
the same reason as the step 1 firms. Also, because the expected average
price of X is slightly increased by the step 1 oligopoly, Y production
capacity is reduced further. This underinvestment in Y production then
further reduces investment in X production, and this effect is recursive,
resulting on an effective multiplier for underinvestment that's
approximately proportional to the number of steps.
Shortages in
America in 2021 that may have been caused by this dynamic include: lumber
(due to a shortage of mill capacity), beef (due to a shortage of meat
packing capacity), polyethylene, and polypropylene.
Suppose all firms
are equally efficient, but firm A is vertically integrated, doing step 1 and
step 2. There is then a price for Y at which A will expand production while
other firms will reduce production. So, production shifts to vertically
integrated firms when efficiency is equal.
One implication of this
model is that vertically integrated firms participating in markets will have
different prices for "internal customers" and "external customers" for
intermediates, and that does indeed happen.
Another implication of
this model is that it's possible to increase economic efficiency by
subsidizing raw materials which are processed extensively, and some
countries (notably China) do act as if they believe that to be the case.
The problem here is basically
that the
companies that are capable of building things already own a lot of those
things, and don't want to compete with themselves. We want new entrants who
don't care about the profits of incumbents to come in and make new
investments, but economies of scale and institutional knowledge block new
entrants.
Framed this way, there's a straightforward solution: force
the companies that produce facilities to divest the profits from them. If
the companies that can build things own too much of them, then force that to
not be the case.
If a company builds, say, a chemical plant, it would be required to do one of the following:
- sell it to
another entity that runs it
- sell it to another entity, and get paid to
operate it
- maintain ownership, but form a contract with an investment
group that transfers all profits from operation in exchange for a fixed
payment
These other entities would of
course be required to be financially independent from the builder.
Walmart and Amazon would be forced to divest the production of new
warehouses, requiring them to instead buy turnkey warehouses from separate
companies. The companies that produce meat-packing factories and lumber
mills would be forced to sell them. Of course, anti-monopoly provisions to
force some distribution of ownership would also be needed - and
anti-monopoly action in the USA today is completely inadequate.