The Political Economy of Pipelines.

• Author: Church, Jeffrey

The Political Economy of Pipelines by JEFF D. MAKHOLM: (University of Chicago Press, 2012) 288 pages. ISBN 9780226502120.

Pipelines have typically been monopoly franchises, either state owned or regulated. The conventional wisdom in economics has been that franchise monopoly arises because of technology, in particular natural monopoly, which requires a single provider for cost minimization. Unlike perfect competition, natural monopoly involves a tradeoff between allocative efficiency and cost efficiency. Minimization of industry costs requires a single supplier, but that typically results in monopoly power. Offsetting monopoly power by encouraging competition can result in cost inefficiency and not eliminate or minimize allocative inefficiency. Instead cost efficiency is to be achieved by designating a single supplier and restricting entry, with prices set efficiently by regulation.

This technological basis for price and entry regulation was challenged by Demsetz's (1968) suggestion that under conditions of natural monopoly, competitive auctions to serve could replace competition in the market. Assuming competition in the auction, with potential suppliers' bids equal to the price at which they would supply, Demsetz argued would result in an efficient price subject to the constraint that the supplier break even. However, Goldberg (1976) and Williamson (1976) challenged Demsetz' suggestion that regulation could be replaced by competition for the market by observing that his analysis was not robust to changing conditions and production requiring sunk expenditures. Instead they introduced the hypothesis that regulation should be viewed as an administered, relational contract, that was likely to be the low cost governance alternative in a contracting environment characterized by asymmetries of information, uncertainty, sunk capital investment, and many consumers. Thus, regulation arises not as a response to the conditions of technology, but instead as a second best institutional response in a contracting environment where transaction costs are important. Goldberg and Williamson's contributions were important early contributions in the development of the new institutional economics. (1)

This volume is a significant contribution to the small literature applying this latter framework in a case study setting. It applies two theoretical frameworks of the new institutional economics--transaction costs and public choice--to provide compelling and...