11 J.L. & Econ. 55 (1968)
Why Regulate Utilities

handle is hein.journals/jlecono11 and id is 61 raw text is: WHY REGULATE UTILITIES?*
HAROLD DRMSETZ
University of Chicago
CURRENT economic doctrine offers to its students a basic relationship be-
tween the number of firms that produce for a given market and the degree
to which competitive results will prevail. Stated explicitly or suggested im-
plicitly is the doctrine that price and output can be expected to diverge to
a greater extent from their competitive levels the fewer the firms that
produce the product for the market. This relationship has provided the logic
that motivates much of the research devoted to studying industrial concen-
tration, and it has given considerable support to utility regulation.1
In this paper, I shall argue that the asserted relationship between market
concentration and competition cannot be derived from existing theoretical
considerations and that it is based largely on an incorrect understanding of
the concept of competition or rivalry. The strongest application of the
asserted relationship is in the area of utility regulation since, if we assume
scale economies in production, it can be deduced that only one firm will
produce the commodity. The logical validity or falsity of the asserted rela-
tionship should reveal itself most clearly in this case.
Although public utility regulation recently has been criticized because of
its ineffectiveness or because of the undesirable indirect effects it produces,2
the basic intellectual arguments for believing that truly effective regulation
is desirable have not been challenged. Even those who are inclined to reject
government regulation or ownership of public utilities because they believe
these alternatives are more undesirable than private monopoly, implicitly
accept the intellectual arguments that underlie regulation.3
*The author is indebted to R. H. Coase, who was unconvinced by the natural
monopoly argument long before this paper was written, and to George J. Stigler and
Joel Segall for helpful comments and critik..ms.
I Antitrust legislation and judicial decision, to the extent that they have been motivated
by a concern for bigness and concentration, per se, have also benefited from the as-
serted relationship between monopoly power and industry structure.
2 Cf., George J. Stigler and Claire Friedland, What Can Regulators Regulate? The
Case of Electricity, 5 J. Law & Econ. 1 (1962); H. Averch and L. Johnson, The Firm
under Regulatory Constraint, 52 Am. Econ. Rev. 1052 (1962); Armen Alchian and
Reuben Kessel, Competition, Monopoly, and the Pursuit of Pecuniary Gain, in Aspects
of Labor Economics 157 (1962).
3Thus, Milton Friedman, while stating his preference for private monopoly over
public monopoly or public regulation, writes:

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