§ 5. Localized production favoring monopoly. A number of these enterprises have characteristics in common which appear to make inevitable their drift into monopolistic control. Waterworks, gas, electric lighting, street railways, telephone systems, are among these. However fierce may be the competition between separate private companies for a time, sooner or later either one company drives out the other or buys it up, or both come to an agreement by which the public is made to pay higher prices.

A feature favoring the growth of monopoly when such industries are left to private enterprise is the need to produce and supply the commodity or service at a given locality. While two street railways can compete on neighboring streets, it is physically impossible for two or more to compete on the same street. Two systems of water-mains or gas-mains can be put down, as sometimes is done; but this is not only a great economic waste, but the tearing up of the streets is an intolerable public nuisance. This difficulty is less marked in the case of telephones and electric lighting, and some persons still cling to faith in competition to regulate the rates in those industries; but faith in competition between water companies and between gas companies has been given up by nearly all persons now, as it was long since by students of the subject.

4 See ch. 17. $ 5, industrial revenues of governments.

§ 6. Economies of large production favoring monopoly. A second feature favoring monopoly in such industries is the marked advantage of large production in them. These industries are usually spoken of as "industries of increasing returns." This advantage is enjoyed in some degree by every enterprise, but it is gradually neutralized and limited. The need to extend an expensive physical plant to every point where customers are to be served, and the very much smaller cost per unit of delivering on the same street large rather than small amounts of water, gas, electricity, and transportation, offers a greater inducement for one competitor to crowd out or buy out the other at a more than liberal price. Even then, larger net dividends and correspondingly larger capitalization are secured than were before possible to both companies combined.

§ 7. Uniformity of products favoring monopoly. A third feature favoring monopoly is uniformity in the quality of the product furnished. It is a general truth that competition is most persistent where there is the greatest range of choice open to the customer, and consequently the most individual treatment required of the enterpriser. An artist's product is very distinctive. Even a storekeeper attracts about him a body of patrons who like his product (for the merchant's manner and method of dealing are qualities of his goods) and who cannot be tempted away by slight differences in price. Rival companies in the stage of competition are seen to claim superiority for their particular goods and to improve their service in every way possible. A new telephone company, entering where a monopoly has held the field, works at once a wonderful betterment in rates, courtesy, and service. But, as the product of all competitors attains the highest technical standard possible at the time, the rivalry is reduced to one of price, and it is usually a "fight to the finish."

§ 8. Franchises favoring monopoly. A fourth feature favoring monopoly in these enterprises is the necessity of making permanent and exceptional use of the public streets and alleys. If this right were granted by a general law to every citizen, this feature would be sufficiently implied in the foregoing discussion. As it would be intolerable to allow private interests to use public property in whatever way they wished, the legislative body makes special grants in such cases, in view of the circumstances. Not only is the legislature (or council, or county board of commissioners, etc.) led by the economic difficulties to withhold a charter from a second company, but it may be corruptly influenced by the company already established. The knowledge of the opposition to be encountered in getting a franchise must keep competitors out, even though monopoly prices are maintained.

Because of these several features, which are so closely related that they form a common character, more or less fully shared by various industries, and especially in view of the necessity for the formal granting to them of peculiar privileges in the form of a public franchise, they are monopolies. The public, in order to protect itself, is forced to undertake an exceptional control of these industries.

§ 9. Various policies toward local public-service industries. Several courses are open to the public, acting in its political capacity, to retain these monopolistic advantages for the general welfare. (a) It may do nothing, trusting vainly to competition to regulate the rate, or consciously leaving the result to be worked out by the monopoly principle; this is what in most cases has been done in the past in America. (b) It may leave the rate to be fixed by the monopoly principle, but charge for the franchise so much that the value of the monopoly is appropriated into the public treasury; virtually this is selling the franchise at auction. (c) It may attempt, in granting the franchise, to fix near cost the charge for the service or product, so that the franchise will be worth little as private property. (d) It may leave the price to be fixed at cost, not definitely by law, but by an administrative commission having the power to regulate rates. (e)) It may have public officials carry on the business, either selling the product at cost or making monopoly profits that go into the public treasury. Various combinations of these plans are followed in practice.

After plan (a), rates fixed in the franchise (c) had wide vogue. But fixed maximum rates, even under the most favorable conditions, are rarely equitable, for a uniform rate does not apply justly to all parts of a town and to all conditions of service. Fixed maximum rates become too high in periods of stationary prices, when technical improvements are rapidly introduced, and from a different cause, when general prices are falling, as between 1873 and 1897. They became too low (unless offset by extraordinary technical improvements and economies of increasing output) in periods of rising prices. Since the nineties many public utilities have been brought to the verge, or quite into, bankruptcy, while many others have found their salvation in the administrative commissions, which had the power to increase the rates as well as to reduce them.

The plan of selling the franchise (b) is difficult to apply because of the limited number of bidders and because of the unpredictable character of the returns. There remain the policies of administrative rate-fixing (d) and of public ownership to secure the profits of monopoly to the public, either directly or in a diffused manner. In the recent period of rising prices the administrative state commissions have, like the Interstate Commerce Commission, performed very valuable services. But, on the whole, the general trend of municipal policy is everywhere toward public ownership of this type of local public-service industries.