11 - Market power and storage  pp. 310-332

Market power and storage

By Jeffrey C. Williams and Brian D. Wright

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Most people feel sure that storage monopolization reduces their welfare, but they generally have no clear perception of why or of how a storage monopolist behaves. For example, in times of shortage, observers often jump to the conclusion that a storage monopoly involves excessive withholding of supplies from the market, that is, storing too much. But Adam Smith (1784) found the answer. If the monopoly is truly over storage, as when someone holds a patent for warehousing technology, too little is stored. Abnormal profits cannot be earned by buying up the current availability and holding it off the market.

Confusion comes from imprecision in the scope of the monopolist. Is the monopoly power over storage specifically or over all current and prospective supplies? Monopoly over all distribution such that consumers could buy solely from one party (as in Kennedy 1979) is a different matter entirely from a monopolist over the storage technology alone. Here in Section 11.1 we examine a monopolist over distribution. In Section 11.2 we examine the distinctly different subject of a monopoly over storage technology alone.

Control of storage is likely to be a side issue if one party controls the whole distribution of the crop and is free to charge each period what the traffic will bear. A firm with a monopoly over distribution would want to restrict its sales each period to an amount where demand becomes elastic. If supplies received are excessive, destruction may be much the most effective method.