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. the two lines, therefore, don’t increase public welfare. What can we say about natural monopoly and the Beer Store?
The Problem Of Monopoly
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 of public ownership is to stop a private company from exploiting consumers.
Identifying a natural monopoly involves knowing costs structures under various hypothetical states of the world. This 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. It is possible that something was a natural monopoly but technological changes now mean it isn’t. (Theoretically vice versa is also true I guess but it is harder to think of examples).
Natural Monopoly And The Beer Store
In Ontario, the sale of spirits is controlled by the LCBO. This is a state owned monopoly that regulates alcohol sales. A 2014 commission, led by Ed Clark of TD Bank, looked into alcohol sales in the province. The commission 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. These might have an incentive to encourage drinking.
In Ontario, beer distribution is [written in 2014] largely controlled by The Beer Store, a privately owned state-sanctioned monopoly. This organization is quite atypical. The LCBO isn’t a natural monopoly. Therefore, I can’t see any reason why The Beer Store would be a natural monopoly. Why the province of Ontario gave a private monopoly the right to distribute beer is a puzzling historical question. The strongest argument seems to be to keep a single organization responsible for beer distribution. This was likely to be more successful at keeping beer out of the hands of minors than lots of mom-and-pop stores. The firms owning the Beer Store were originally Canadian. Still, mergers have meant this is hard to argue now. The Beer Store is no longer even protectionist. (Not a good reason for something but a common one nonetheless).
The Politics Of Change
To see how such quirky things can happen note 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. The commission proposed a messy compromise. The LCBO (and some supermarkets) could compete with The Beer Store. They could sell 12 packs of beer. They could not sell 24 packs. What? Why? I’m guessing that makes sense politically. It seems completely arbitrary to the outside observer.
Even beyond the economic arguments, I think this is a great example of political decision-making. Clearly, the Clark commission wanted to create a change. Yet, they didn’t want to upset powerful stakeholders too much. Hence, the bizarre rules around 12 packs and 24 packs. I just hope no one in Ontario ever works out that buying 2 separate 12 packs will get them 24 beers.
[This post was written back in 2014. There have been further developments. The Ontario government in 2019 announced its intention to cancel the relationship with the Beer Store. It seems that more change is coming. Although as I write everything remains unclear].
For more on competition see here, here, and here.
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.