The danger of monopoly

By Otieno Odhiambo | Published Tue, January 9th 2018 at 11:53, Updated January 9th 2018 at 12:07 GMT +3

Electricity is a necessity in most of our daily activities. We need to light our homes and power our machines at the offices. Unfortunately, electricity is largely expensive in this country because we rely on one company, Kenya Power.

A month or two ago, there was a flood of complaints about hiked power bills, and one would have expected that Kenya Power would have come out to explain those strange bills.

The danger to Kenya Power is that when the consumer decides that the electricity is unaffordable and unreliable, they are likely to migrate to generators or resort to illegal connections, and this will adversely affect the company’s revenue. To maintain its income, the firm might decide to increase charges on consumers who cannot migrate or involve themselves in unethical and illegal acts to access power.

It is not surprising that citizens are suspicious of monopolies and consider them undesirable. There are many monopolies in Kenya, which economists consider a major cause of inequalities in business.

The danger with monopolies is that they wield a lot of economic power, which enables them to exploit factors of production such as labour and capital. They are large enough to decide to pay the salaries they want or demand capital from the financiers at the interest rate they want; and they charge the price they want for their products and services. Monopolies adversely dictate our lives.

A company that is a monopoly cannot be so efficient as to reduce operating cost and enhance our social welfare. It lacks incentives to reduce costs due to the absence of pressure or competition and this translates into uneconomical cost per unit of output. Firms which enjoy monopoly or face limited competition are able to make a lot of profits and lack the incentives to keep their cost as low as possible because they can transfer such costs to the consumer, regardless of the effect of such transfer.

Set prices

There are those who argue that if the Government can set prices for petroleum products it should do the same for Kenya Power.  However, consumers tend to be worse off whenever governments fix prices of products and services. In any case, Government is a shareholder in the power company and other monopolistic companies that enjoy its protection.

Those of us who have been around long enough know that Kenya Posts and Telecommunications Corporation - which later split into Telkom Kenya and Postal Corporation - had a monopoly of telephone services, and its charges were high. That changed when mobile phone service providers Airtel and Safaricom came in and due to competition, the calling costs are getting lower for the benefit of consumers. That is how powerful and beneficial competition is to the consumer and economy.

It is time the Government intervenes to influence the prices charged by firms operating as monopolies to help businesses cut their costs. This it can do through regulation and by creating an environment for healthy competition. The World Bank and IMF have encouraged privatisation, but much as that leads to greater efficiency, it can allow the new owners to access super profits and create a new market power that ultimately harms consumers. 

Regulations exist in the country but are largely ineffective. Look at the rate at which lives are lost on our roads. The danger is that regulators are captured by those they are supposed to regulate.

Prof Slightz stated that “regulators are pulled frequently into the camps of those they regulate. This could happen through bribery and corruption, but more likely is that over time employees of a regulated industry develop personal friendships with the regulators who in turn come to rely on their expertise and judgement.

“Worse, regulatory agencies (of necessity) tend to hire persons from the firms in the regulated industry. By the same token, regulators who demonstrate an understanding of the industry may be rewarded with good jobs in that industry after they leave government service.”

The only viable window then is for the Government to encourage competition among firms and industries. This would suggest even importing power from neighbouring countries.

The writer teaches at the University of Nairobi.