Monopoly

Monopolies Pure Monopolies (rare) Near Monopolies Public Utilities Cable TV (in some locations) Sports Teams? Near Monopolies Intel (81%) Wham-O (90%) De Beers (55%)

Barriers To Entry Economies of Scale ATC continues to decrease at high levels of output “Natural Monopoly” Demand intersects LRATC where LRATC is still declining

Barriers To Entry Legal Patents (20 years) Licenses FCC Taxis Liquor Licenses Marijuana Dispensary

Barriers To Entry Ownership/Control of Resources Natural Resources Inco (90% of known nickel) Local Control

Barriers to Entry Pricing Advertising and Other Practices Predatory Package discounts Advertising and Other Practices

Monopoly Monopolists do not face a supply curve It is the Price Maker

Competitive Price and Output

Competitive Consumer/Producer Surplus

Monopolist Consumer/Producer Surplus/DWL

Productive Efficiency?

Allocative Efficiency?

Conclusions About Monopolist’s P and Q

Monopolist’s Costs- Higher or Lower

Monopolist’s Costs- Higher or Lower Economies of Scale/Natural Monopoly Multiple firms would lead to increased LRATC Examples: Utilities Nonrivalrous Consumption- Microsoft Windows Wireless Service Network Effect- MySpace, Facebook

Monopolist’s Costs- Higher or Lower X-inefficiency: Reality that lack of competition may lead to costs higher than those assumed by economic theory

Monopolist’s Costs- Higher or Lower X-inefficiency: Reality that lack of competition may lead to costs higher than those assumed by economic theory

Monopolist’s Costs- Higher or Lower Rent Seeking Money spent on lobbying and other activities to maintain monopoly through government legislation/licensing

Monopolist’s Costs- Higher or Lower Advertising De Beers Commercials

Monopolist’s Costs- Higher or Lower Research and Development (LRATC) Historic View: Think X-Inefficiency Caveat: Think Google

Price Discrimination Conditions Monopoly/Market Power Market Segregation No Resale

Price Discrimination Senior Discount Challenge Pick a market that employs senior discounts for profit maximization Draw two sets of C and R curves Which look the same? Which look different? Indicate Profit on Senior and Regular Diagrams

Welcome to Market Failure

Natural Monopoly Regulatory Options

Natural Monopoly Regulatory Options What happens if the monopoly is broken?

Natural Monopoly Regulatory Options

Natural Monopoly Regulatory Options Unregulated- Price on D above MR = MC 2. Fair Return- P = ATC 3. Social Optimal (Allocatively Efficient) P = MC

PER UNIT TAX

LUMP SUM TAX

PER UNIT SUBSIDY

LUMP SUM SUBSIDY

PER UNIT V. LUMP SUM PER UNIT LUMP SUM SHIFTS MC Changes profit-max. Q and P Variable cost LUMP SUM SHIFTS FC/ATC, THEREFORE, NOT Q Fixed cost P and Q same; Profit/Loss Changes

Monopolistic Competition

Product Differentiation Physical Differences Perceived Differences Support Services

Monopoly v. Monopolistic Competition Why is it called monopolistic competition? How will the demand curve differ? How will the MR curve differ? Long Run? (remember- no barriers)

Which go together? Allocatively Efficient Productively Efficient Profit-Max. Fair Return Socially Optimal Min. ATC MR = MC P = ATC P = MC

Fair Return and Socially Optimal?

Excess Capacity Q Gap between profit max. and min. ATC

4 Firm Concentration Ratio Sum of 4 largest firms’ market share > 40% = Oligopoly < 40% = Monopolistic Competition

Herfindahl-Hirschman Index Sum of squared market shares of all firms s12 + s22 + … Range of 0 - 10,000

Herfindahl-Hirschman Index Sum of squared market shares of all firms (% Share of Firm 1)2 + (% Share of Firm 2)2 … Range of 0 - 10,000

Natural Oligopoly 25,000 Units per Month 100,000 80 $200 Dollars 80 $200 Dollars LRATCTypical Firm H F E DMarket

Oligopoly- Kinked Demand

Horizontal Merger Two companies in same industry Red Flag: HHI increase of 100 or more

Vertical Merger Two companies in complimentary industries

Potential Competition Merger

FTC

Denied

Antitrust Laws Sherman Antitrust Act (1890) Banned predatory and unfair business practices Clayton Antitrust Act (1914) Specified unfair practices Interlocking Directories Price Discrimination Exclusive Dealings and Tying Horizontal Mergers that Destroy Competition Federal Trade Commission (FTC) Approves mergers and enforces trade regulations

Homework List Legibly Applied to Our Simulation Players, Strategies, Payoffs Dominate Strategy Nash Equilibrium Explicit Collusion Tacit Collusion Tit for Tat Cheating Cartel

Game Theory Players, Strategies, and Payoffs Dominate Strategy A player has a single best strategy regardless of opponent’s strategy decision Nash Equilibrium No player can benefit from a unilateral move Dominate Strategy Equilibrium Nash Equilibrium AND both players are playing a dominate strategy

Circle Method Dominate Strategy Nash Equilibrium Player on Left Two circles in same row Player on Top Two circles in same column Nash Equilibrium Two circles in same box Dominate Strategy Equilibrium Two Circles in same box and both players have dominate strategy