Public Enterprise in Monopolistic and Oligopolistic Enterprises

I Vogelsang

• Publisher: Taylor & Francis
• Year: 2013
• Print ISBN:
  9780415866262
• eBook ISBN:
  9781136470899
• Topic: Business
• Subtopic: Business General
• Index: Business

Public enterprises remain of fundamental importance in advanced economies, and this volume characterises them as hybrids, influenced by markets and ministries.

Public Enterprise in Monopolistic and Oligopolistic Industries

INGO VOGELSANG

Department of Economics, Boston University, Massachusetts

1. INTRODUCTION

Characterization: Public Production of Private Goods

Consider our title. “Public” constrains us to organizations owned or controlled by representatives of the people as a whole.¹ “Enterprises” constrains us to organizations which sell their output in markets. “In Monopolistic and Oligopolistic Industries” constrains us very little at all, since the bulk of value added by public enterprises in mixed economies² occurs precisely in such highly imperfect markets. However, it allows us to reduce emphasis on externalities and linkages.

We are thus concerned with public production of private goods. Or, with public supply of private demand. What economic issues arise in this context?

Public Enterprise: An Oxymoron?

“Public enterprise” is sometimes viewed as an oxymoron—an internal contradiction in terms. This characterization is based more on emotion than on logic, but contains enough truth to motivate an overview of two of the central issues in public enterprise economics.

The lesser of the two oxymoronic elements of public enterprise involves its very existence. Private production of private goods seems intuitively appealing, as does public production of public goods. The off-diagonal cells of the matrix, however, seem vaguely unsettling. This unease is symmetrical: on the political right, public production of private goods is seen as “creeping Socialism”; on the political left, private provision of public goods (for example, private prisons in Texas) elicits a similar visceral negativism. The analytic question is whether or not there is any economic logic behind the existence of public enterprise. This issue is addressed in Section 2.4 using the twin concepts of market failure and organizational failure.

Given the existence of public enterprises, the second oxymoronic element addresses their behavior. Controlled by lethargic bureaucrats and buffeted by political demagogues, how can anything “public” also be an “enterprise” with its connotations of efficiency and entrepreneurial dynamism?³

Definition

Aharoni [2] characterizes public enterprises by three properties. The enterprise has to be publicly owned. It has to produce private goods; and it has to sell these goods at a price related to cost. None of these properties is air tight.

Consider public ownership: The by far largest German electric utility, RWE, is 31.4% owned by counties and municipalities, while the rest is owned by 190,000 private shareholders. However, a large fraction of the municipal shares has twenty-fold voting power so that the majority of votes is in public hands (Monopolkommission [84], p. 131). RWE is therefore commonly regarded as a public enterprise. This suggests that it is control that matters. But then regulated private utilities, such as Consolidated Edison in the United States, might have to be considered as public enterprises as well (Bös [28]). In our view, there are several arguments against doing this. First, there are theoretical and empirical reasons to believe that public ownership makes a genuine difference in enterprise behavior. Second, regulatory control is rarely comprehensive. It only relates to certain aspects of firm behavior. Ownership gives the government additional control that it does not have under mere regulation.⁴ Third, statistics about ownership are more readily available than about regulatory control. For instance, there is an enormous fuzziness about the extent of regulatory control in the United States. There, industries such as automobile manufacturing and coal mining are traditionally not counted as regulated while telecommunication is. Even before the AT&T divestiture one could have easily argued for the reverse.

Now consider the production of private goods: Public enterprises are traditionally active in areas that are loaded with externalities and other public goods aspects. In developing countries public enterprises are often purposefully located in particularly backward areas so that they provide for infrastructure to attract other industries. Many public enterprises produce under increasing returns to scale due to indivisible inputs which make production “semi-public”. Also, public transportation companies reduce congestion of private traffic. Again, “publicness” is a question of dominance. Many goods produced by private firms have public goods aspects, for example, automobiles, office buildings, shopping centers, private neighbourhood developments, or computer software. The main consequence of “privateness” of the public enterprise's offerings is the possibility of using the pricing mechanism. That is why the third property of cost related pricing is a check on the second. It is again difficult to specify how tight this relationship has to be. Local transportation authorities in many countries cover barely 20-30% of their costs via prices. On the other hand, courts may cover similar percentages of their costs through fees. Are they both public enterprises or both not? Does the public goods aspect help us to differentiate between the two? In order to circumvent this problem, many authors have required separate budgeting or even legal separation as a property of public enterprises as opposed to public administration.

We will here stay with Aharoni's definition and accept some unclear boundaries between public and private enterprises and between public enterprises and public administration.

Empirical Magnitudes

Public enterprises on average contribute about 8-10% to the GDP of mixed economies. Although this percentage varies substantially, it is not easily linked to other variables. For example, the World Bank [141] shows that this ratio is not strongly linked to the level of development (measured by GDP per capita). Still, the most industrialized societies rarely exceed a ratio of 10% while many LDCs have ratios of 20-40% in spite of large private rural sectors. Also, as argued by Jones and Mason [61] the ideologies of political left and right matter less than most people would believe. Right wing governments in Taiwan or South Korea have been going along with public enterprise sectors that are relatively as large as in India.

Public enterprises are among the largest businesses in the world and often the very largest firms in their respective countries. Some of them are well known locally like the United States Post Office or internationally like most international airlines. Some of them are obscure like IRI (“the biggest company you never heard of”, Wall Street Journal [130]). According to the Wall Street Journal IRI in 1983 employed roughly 525,000 people, had sales of $24 billion, debts of $20 billion and annual losses of $1.5 billion.⁵

Public enterprises can be found in almost all economic sectors including forestry and agriculture. Their main activities, however, are concentrated in highly capital intensive monopolistic and oligopolistic industries in services and in mining and manufacturing. Currently, first class main services are public supplied in all countries of the world. There exist very few countries in which telecommunications, railroads, electricity, gas and water are not predominantly supplied by public enterprises. All of these services have in common a large network linking produces with consumers (or consumers to each other: telecommunications). Other transportation and financial services, mining and manufacturing are a mixed bag. They are supplied by private firms in some countries, publicly in others. It is here that most of the differences between countries occur. In, particular, LDCs tend to show comparatively more public enterprises in manufacturing than developed countries. Economies of scale and large sunk cost relative to the size of the market seem to be responsible for this difference.

In recent years a few countries, notably Chile, New Zealand, Britain, and Bangladesh, have engaged in major privatization programs of public enterprises. Many more countries actively study this possibility. In the last few years, thus the differentiation between countries with respect to public ownership has grown. What is publicly owned in one country is regulated and privately owned in another or even unregulated in a third. Table 1 shows the extent of public ownership in major industries with public involvement in four OECD countries. Only posts are public owned in all four. Manufacturing sectors with heavy political stakes, such as automobile manufacture, steel making and shipbuilding are private in all four countries now or will be so shortly. Services, energy and transportation sectors are between the two extremes with railroads and electric utilities tending more to the public side and oil, coal and gas tending more to the private side.

TABLE 1
The Extent of Public Ownership and Regulation in Four Countries

Country	Britain	Japan	United States	West Germany
Industry Posts	PE	PE	PE	Public Administration
Telecom	ME, Partially regulated	ME, Partially regulated	Private, partially regulated	PE
Electricity	PE*	Private, regulated	Private, regulated and PEs	Predominantly ME, partially regulated
Gas	Private, regulated	Private, regulated	Private, partially regulated	Predominantly private
Oil	Private	Private	Private	Private
Coal	PE	Private (subsidized)	Private	Predominantly private (subsidized)
Railways	PE	ME	Private, PE
Airlines	ME	Private, regulated	Private	ME
Trucking	Private	Private, regulated	Private	Private, regulated
Automobiles	Private, PE*	Private	Private	Private
Steel	PE*	Private	Private	Private (subsidized)
Shipbuilding	Private	Private	Private	Private, PE (subsidized)

* Scheduled for Privatization

PE = Public Enterprise

ME = Mixed Enterprise with private and public ownership

Overview

This monograph takes a middle road between two recent more extensive and more extreme treatments of public enterprises. Aharoni [2] is much richer in institutional detail and in his emphasis on managerial issues. Bös [28] on the other extreme is more theoretical and rigorous, concentrating almost exclusively on pricing issues.

In Section 2 we develop an analytical framework to study public enterprises in a market environment. It enriches the traditional industrial organization approach to markets which an institutional approach representing the various agents influencing public enterprises, in particular the ministries. This b...

Table of contents

• Front Cover
• Half Title
• FUNDAMENTALS OF PURE AND APPLIED ECONOMICS
• Title Page
• Copyright
• Title Page
• Copyright
• Contents
• Acknowledgements
• Introduction to the Series
• 1. Introduction
• 2. Analytic Framework: Markets and Ministers
• 3. Normative Theory: How Public Enterprises Should Behave
• 4. Practice and Positive Theory: How Public Enterprises Actually Behave And Why
• 5. Policy: How to Move Actual Behavior Towards Desired Behavior
• 6. Privatization of Public Enterprises
• Bibliography
• Index