The Monopoly Problem Breaking up is hard to do. A story. Some theory. Public policy. John D. Rockefeller,

Concepts Monopoly power Deadweight loss Blocked entry pricing Stupid monopolist’s price Contestable markets Unnatural monopoly Structuralist Theory Merger Review Policy Dumping Target Pricing Tullock Cost of Monopoly

Let’s return to Fishland

What is the problem? Big versus small? Just BIG? Reduced competition? Protection of competitors? A comfortable life for a favorite few? Restricted output?

Old competitive price

Stupid monopolist’s price

Entry blocking price Stupid monopolist’s price

Concepts Monopoly power Deadweight loss Blocked entry pricing Stupid monopolist’s price Contestable markets Unnatural monopoly Structuralist Theory Merger Review Policy Dumping Target Pricing Tullock Cost of Monopoly

WHAT TO DO? Option One: Intervention Break up Regulate State ownership State-sponsored competition Option Two: Do nothing.

Dominant Antitrust Theory Structuralist Structure Conduct Performance Structure is measured by concentration. Share of output accounted for by top 4, 10 or 20 firms. High concentration leads to collusion, lack of cost control, higher prices, less response to consumers. Non-competitive conduct leads to inefficient economic activity, less effective use of resources. The concern is for HORIZONTAL mergers.

Merger Types Horizontal: Firms that compete for the same consumer patronage. Vertical: Firms that have a supplier/purchaser relationship. Conglomerate: Firms that not related in either consumer or production relationships.

New Learning Potential entry/ contestability Competitive behavior. Efficient use of resources.

Blocked Entry and/or Exit Monopoly Power Less Responsive Producers Inefficient Use of Resources

An Example of State-sponsored Competition EU approves Internet project International Herald tribune, July 20, 2007, 11. Germany won European Commission approval Thursday to put E120 million into an Internet search system being developed by companies including Bertelsmann and Thomson. The benefit to the public of creating new technologies and putting more cultural material onto the Web outweighs the risk of giving selected companies an unfair advantage via subsidies, the top EEU body ruled in Brussels. The $166 million program, called Theseus, is the German portion of a joint project with France, where it is called Quaero, to create a European rival to Google, the world’s most popular online search engine.

Schumpeter’s Creative Destruction Monopoly just doesn’t matter, even if prices are raised and output is reduced. Monopoly is temporary. Unless government granted.

Preemptive Strike Nip them in the bud!

Merger Logic Market extension Product extension Economies of scale and scope Brand name acquisition Talent acquisition Portfolio diversification, geographic & industrial Learning Monopoly power Undervalued assets

Merger Policy Prenotification Review Modification Action

Concepts Monopoly power Deadweight loss Blocked entry pricing Stupid monopolist’s price Contestable markets Unnatural monopoly Structuralist Theory Merger Review Policy Dumping Target Pricing Tullock Cost of Monopoly

Dumping Is it target pricing or International price discrimination? Remedy? Price increase for consumers in all markets.

EU trade chief seeks to end light-bulb tariff International Herald-Tribune, July 14-15, 2007, 13 The European Union trade chief, Peter Mandelson, faces a new dispute over Chinese imports as he tries to eliminate anti- dumping duties on energy-saving light bulbs. Mandelson told EU countries this week that the punitive tariffs should not be renewed, trade diplomats said. The duties push up the price of energy-saving bulbs from China by as much as 60 percent, at a time when the EU is pursuing ambitious energy-saving targets to fight climate change. Mandelson faces opposition from Germany, home to Osram, the biggest maker of energy-saving light bulbs in the EU. “We favor globalization, but it has to be fair,” an Osram spokeswoman said. “Dumping is not fair competition.” The opposite camp is the Dutch electronics group Philips, which imports large amounts of energy-saving light bulbs from China and wants the duties scrapped.

Philips Preferred Price Osram’s Preferred Price

The Deadweight Loss of Government Granted Monopoly: Gordon Tullock’s Contribution

Tullock Costs A Trapezoid of Losses

Concepts Monopoly power Deadweight loss Blocked entry pricing Stupid monopolist’s price Contestable markets Unnatural monopoly Structuralist Theory Merger Review Policy Dumping Target Pricing Tullock Cost of Monopoly

Questions for Discussion 1.Just what is the monopoly problem? 2.Why is breaking up a monopoly “hard to do”? 3.Should the state engage in merger reviews? What are the relative merits of Schumpeter’s approach? 4.When might Gordon Tullock’s notion of deadweight loss be a relevant consideration?