Natural Monopoly and The Beer Store

A natural monopoly occurs when an industry gives the best social outcome if it is run by a single firm. For instance, building two railways lines to a small town wastes resources and so doesn’t increase public welfare. The problem is that the monopolist has great power to increase prices allied with little incentive to provide good service. One traditional solution was to take the monopoly into public ownership; the logic being to stop a private company exploiting consumers.

Identifying a natural monopoly involves knowing costs structures under various hypothetical states of the world which means judgments of what is a natural monopoly will differ between people. Furthermore, as technology advances costs may change over time potentially altering the judgment.

In Ontario the sale of spirits is controlled by the LCBO, a state owned monopoly that regulates alcohol sales. A recent commission led by Ed Clark of TD Bank, determined that; “The LCBO is not a natural monopoly, as is the case for electricity or gas distribution” (Clark 2014). The LCBO (public) monopoly is therefore, presumably, to keep alcohol sales away from private companies that might have an incentive to encourage drinking.

In Ontario beer distribution is largely controlled by The Beer Store, a privately owned state sanctioned monopoly. Given the LCBO isn’t thought to be a natural monopoly I can’t see any reason why The Beer Store would be a natural monopoly. Why, therefore, the province of Ontario gave a private monopoly the right to distribute beer is a puzzling historical question.

To see how such quirky things can happen note that after the changes to alcohol distribution proposed by the Clark commission The Beer Store will be subject to more competition. That said in the coming brave new world don’t expect unfettered competition. In what appears to be a messy compromise the LCBO will be allowed to compete with The Beer Store by selling 12 packs of beer but not 24 packs. I’m guessing that makes sense politically even if it seems completely arbitrary to the outside observer.

Read: Remarks by Ed Clark (2014) available at http://news.ontario.ca/mof/en/2014/10/remarks-delivered-by-ed-clark-chair-of-the-advisory-council-on-government-assets-at-the-metro-toront.html, accessed November 9th 2014.