Ch. 15 Public Policy Toward Monopoly Produce less Q than socially effic. P> MC NOT PROFITS

1.Create more competition A.Anti-Trust Laws Collection of statutes gives govt. power to control markets and promote competition. i.Sherman Anti-Trust Act – does 4 things…? a.Reduce market power of large trusts b.Prevent mergers (Microsoft/Intuit) c.Break up large co’s (AT+T) d.Prevent large co’s from coordinating with each other (Collusion) **To Regulate or Not?**Allow Mergers or Not?** - -not always clear

ii. Clayton Act ….it does what? a.Strengthen Sherman and allow for private law suits iii.Synergies – iv.mergers of efficiency -Company A has an excellent product but lousy distribution whereas Company B has a great distribution system but poor products, the companies could create synergy with a merger.

2.Regulation ( electric, water, phone ) A.MC Pricing i.…but what about losses? Remember….if MC < ATC ; ATC is falling …so a natural monopoly has constantly falling ATC…so MC is always below Profit Max. Natural Monopoly

MC Pricing in this case leads to ….? economic losses. To prevent exit, the govt. must…..? Give subsidy How large? …. The size of the losses Additional Problem……no incentive for firm to reduce costs……b/c no matter how low costs are, P would still be set below

3. Public Ownership (Govt. run) (State run) a.Ex’s i.Post office ii.Water/electric in Europe b. Economists prefer private ownership Too much room for corruption and inefficiency- why don’t they care about inefficiency? … If poorly run- the only loser is the consumer Private owners care about efficiency or they go out of business

4. Do Nothing …why? a. Sometimes the cost to regulate > benefit to consumers and society

1. Define…… -Sell same good to different customers at different prices A.3 Lessons i.Rational strategy…why? - Increase profit ii. Must have ……? a.Market power b.Ability to separate customers - how? - can be prevented by arbitrage (define-) iii. Can raise economic welfare - move closer to socially efficient levels

2. Perfect Price Discrimination -charge each customer exactly what they are willing to pay -impossible; just an extreme view of the concept -Produce socially efficient -Maximize total surplus ; all in form of profit -consumer surplus = … -zero Figure 15-10

Examples Movie tix Airlines Coupons Financial Aid Quantity Discounts -Buy 1 for $1 or 6 for $5