Natural Monopoly

4 May 2005



Boeing and Lockheed Unite for Rocket Business

Lockheed Martin and Boeing have been at loggerheads for some time now over government rocket launches. Both sides have had legal papers out on the other, and the legal claims have been numerous. All that has ended, or will when the peace treaty between the two is signed. Rather than fight one another, they are going to form a 50-50 joint venture, United Launch Alliance, with the support of the Air Force. This is a definite case of a natural monopoly, and the only question now is whether it should remain in private hands.

The two companies already work together through the United Space Alliance, on NASA's space shuttle program, which has been grounded for a long time because the thing has lethal design problems. The new deal would give the US government a single supplier for access to space, relying on Boeing's Delta IV and Lockheed's Atlas V rockets. In a statement, the two claimed the joint venture would save the government $100-150 million a year. James Bell, the top dog at Boeing, said, "By joining together, we are convinced that we can provide the customer with assured access to space at the lowest possible cost . . . ."

Oddly, that isn't what economics as taught at universities the world over would say. In general, monopolies don't save the customer money. They are, in certain cases, preferable to more perfect market solutions because the externalities are less grave. Good examples include national defense, roads, and court systems for conflict resolution. Competition in these areas are wasteful at best (how many roads does one need between points A and B?) and destructive of society at worst (multiple armies in a polity is the definition of civil war). This is such a case, and Boeing and Lockheed would do better to focus on the truth.

And the truth is there just isn't enough work for the both of them as independent launch entities. Reuters quoted an unnamed former Pentagon official as saying "There [could be] a strong argument that there is just not enough volume there to justify two." How many satellites can possibly orbit the Earth before the utility of an additional satellite is surpassed by its launch costs?

So, the question is why does the monopoly get to remain in private hands? The Air Force is content to see this union, and indeed, it has been pressing for it. While it may drive up costs, there is a certain utility to having one entity that is profitable compared to two that are both losing money. And the Air Force does prefer to keep many of its suppliers in the private sector -- after all, a lot of Air Force officers do quite nicely out of consulting when they retire, and that requires a private sector.


© Copyright 2005 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.
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