1. What is Wrong with Monopoly Anyway?
A competitive firm increases production as long as price is above marginal cost,
So in equilibrium P=MC
Which means that anyone who values the good above the cost of producing it gets it
A monopoly selling all units at the same price
Can increase its sales only by lowering its price
So stops when price is above MC
Which means that some who value the good at more than its cost of production don’t get it
Which is inefficient
Price discrimination can reduce this problem and increase profit
Charge a high price to those willing to pay it, a low price to those not
Ideally selling to everyone willing to pay anything more than MC
Perfect price discrimination entirely eliminates this inefficiency
But perfect price discrimination creates a new inefficiency
A firm spending money to make sure that it is the one that ends up with the monopoly
For instance by entering the market early, losing money for a while.

2. Why is Monopoly? Natural Monopoly exists if
Economies of scale continue up to the full size of the market, so that
One big firm can produce at lower cost than several smaller ones
But large firms face diseconomies of scale—too many layers between factory floor and boss
So natural monopoly is more common in small markets
Artificial monopoly. The idea is that a large firm not a natural monopoly
Drives all competitors out by selling at a loss, since it has deeper pockets
But it is also losing money faster, since it is bigger
What about merger to monopoly where there is almost a natural monopoly?
Make monopoly profits for a while
Until the high price pulls in a new entry
Government monopoly
The Post Office is a monopoly because it is illegal to compete in first class mail
Airlines under regulation or licensed professions have entry restricted by law
And may, as in the airline case, have price cutting restricted by law

3. Possible Solutions Natural monopoly Artificial monopoly
Break it up—but that raises costs, creates an unstable situation
Regulate it?
If it is forced to sell at MC it goes broke, since it presumably has fixed costs as well
So either sell at MC and have a government subsidy
Or try to make it sell at average cost
This runs into the obvious regulatory problems
Artificial monopoly
Not a problem if it doesn’t exist
Various laws try to prevent selling below cost
But that also hurts a new firm trying to break into the market
Prevent mergers that will create a firm with very large market share
State monopoly: The simple solution is not to have it

4. Cartels A market with room for only a few firms
If they can get together, reduce output, raise price, profits go up
At the higher price, each firm has an incentive to cheat on the agreement
Enforcing a cartel agreement by contract is not permitted under current U.S. law
But it can be enforced by a regulator who wants to support the cartel
Either by controlling prices, as in the case of the Civil Aeronautics Board
Or by controlling entry
Regulation of trucking and health care required a permit to run a route, build in an area
Professional licensing controls the number of doctors, hair braiders, …

5. Extending the Monopoly: Four steps
The argument: Use a monopoly in one market to get a monopoly in another
The rebuttal: Doing that gets you no additional profit
The more the punch cards cost the less people will pay for the computer
The steel monopolist can push up the prices of autos without running auto companies
Similarly for the wholesale monopolist: Let the retailers compete down their margins
The puzzle: Then why do tie-in sales, vertical monopoly and RPM happen?
Possible answers
Tie in sales might be a way of price discriminating against heavy users
Vertical integration from steel to autos (which didn’t happen, but …)
Could reduce the inefficiency due to charging auto companies a high price for steel
And so giving them an incentive to substitute fiberglass or aluminum
Holding up the retail price gets retailers to compete on non price dimensions
Such as costly showrooms
Which their competitors could free ride on

6. One More Puzzle
Why isn’t use of the showroom or equivalent sold separately?
A new business model
Set up a minivan test agency
Buy one each of the available brands
Charge customers by the hour to test drive, consult your experts, read your literature
Point them at whatever sellers provide the lowest prices
Why doesn’t that model exist?

7. Monopoly in Silicon Valley
Software has unlimited scale economy
It is argued that it also has network externalities
If everyone else is using Word, that makes it convenient for me to use Word
This is the Qwerty/Dvorak story
“The Fable of the Keys” argues that this story is entirely mythical
The authors have also argued that the observed pattern in software
Is serial competition. One program dominates for a while
Then a new competitor starts getting better reviews
And everyone switches (Liebowitz and Margolis)

8. Path Dependence
The Qwerty/Dvorak story is one version of path dependence
Even if that example is bogus, others might not be
Either because of network externalities. Consider languages
Or because of the accumulation of small improvements
For another version, consider the great man version of history
If Julius Caesar, or Napoleon, or Mohammed, or Newton hadn’t lived
The world thereafter would have been very different
Or perhaps not
Or the idea of decisive battles
If Harald Hardraada had not invaded just before William the Conqueror
Harold might have won Hastings, England never been conquered
Or won Hastings and then lost against Harald, England conquered by Norway
Did one bullet at Chancellorsville change the outcome of the Civil War?

9. Legal Systems Very Different
The Idea
All societies face about the same problems
They solve them in an interesting variety of different ways
And they are all grownups
So try to make sense of how each legal system worked
Some of the systems
Imperial China: 2000 years
Periclean Athens: The Legal System of a Mad Economist
Saga Period Iceland: Kill someone, his relatives sue you
Islamic Law: Separation of law and state
Jewish law: When God is the legislator, what if He gets it wrong?
18th Century England: Our legal system without police or public prosecutors
Romani: The rest of the human race as environment, not people
Amish: Anarchists. Very rule centered anarchists.
Pirate ships as democracies
In defense of prison gangs

10. Imperial China: I As viewed from above, a pure criminal legal system
There is no way to sue someone for not paying what he owes you
All you can do is report him as a swindler to the district magistrate
The case is out of your hands. The magistrate can ignore the case, he can
Have him punished for the crime of swindling
Make him pay you
As viewed from below, tort law masquerading as criminal law
In addition to important stuff, there are minor matters
Loans, land, marriage, and inheritance.
I charge you with not paying back the loan
The magistrate schedules a court date, comments on the case
I then bargain with you, you pay back the loan
We humbly ask the magistrate to cancel the court date
The magistrate, being a busy man, agrees
If we don’t reach agreement, the trial is held, the magistrate tells you to pay
If you do, he generously cancels the punishment for your offense

11. Imperial China: II Law and the extended family What is going on?
All relatives are senior or junior to each other, and within some degree of relationship
Any offense by senior or junior, the penalty is scaled down
By junior to senior, the penalty is scaled up
Accusing a senior relative within two degrees of a crime is a criminal offense
Even if he is guilty
What is going on?
They are ruling several hundred million people with a tiny bureaucracy
Part of the trick is to subcontract the job to other authority structures
Of which the extended family is the most important
So the rules reinforce that authority structure
The ability to report crimes by seniors would give juniors power over them
So is blocked

12. Imperial China III: The Examination System
Officials are selected by a ferociously competitive examination system
Early in the final dynasty
About 500,000 licentiates (passed first level) in a population of several hundred million
~18,000 people had passed second level. Pass rate about 1 percent
Third level produced passes out of ~8000 each time it was taken
The exam was testing things mostly irrelevant to the job
Knowledge of the Confucian classics and historical literature
Calligraphy and ability to write poetry and essays in a particular style
Why have the smartest people spend a decade or two studying this stuff?
A test of IQ and willingness to work hard? Surely there were cheaper ways to do that
Indoctrination
You want officials who both can do a good job and want to
Take good care of the people under them, obey the people over them
Indoctrination in Confucianism might do the job
The Confucian theory was law obedience through virtue
But the practice included penalties for magistrates who did a bad job
Is our emphasis on a college education a modern equivalent?

13. Periclean Athens Athenian democracy The Athenian population
Laws were made by an assembly of adult male citizens. Direct democracy
All officials, except generals, were chosen by lot
To serve for a year
A government of amateurs
The Athenian population
Perhaps half were slaves
Some more were metics—resident aliens, often for many generations
The rest were citizens
The court system
Trial by very large juries
Privately prosecuted
What was the incentive to prosecute?
For the equivalent of criminal law, a successful prosecutor usually got a cut of the fine
For the equivalent of a tort prosecution, as in our system the winner collected a damage payment

14. Periclean Athens: Solving Problems
How do you prevent abusive prosecution for the fine or damage payment?
Criminal: If less than 20% of the jury voted for conviction, prosecutor was fined
Civil: If the defendant won, the prosecutor owed him damages–1/6th the claim
An idea it might be worth stealing
The penalty for theft was twice the value of the goods stolen
An obvious opportunity to plant goods while searching
You could search someone’s house for your stolen goods
But had to do it naked
We have a similar issue when cops search for drugs. …
Production of public goods
If you were one of the richest Athenians, every other year you had to produce one
The relevant magistrate would tell you which
Two ways of getting out of it
Show that you are doing one this year or did last year
Show that there is someone not doing one this year or last who is richer than you are
Without IRS or accountants, how do I prove you are richer than I am?
I offer to exchange everything I own for everything you own
If you refuse, you have confessed to being richer, must do the job I was assigned

15. Saga Period Iceland
In the 10th century, Harald Haarfagr unifies Norway under his rule
Lots of people who don’t like it emigrate to Iceland, recently discovered
Set up a legal system based on the Norwegian, with one thing left out
The king
There was a legislature, a court system, but no executive arm of government
All offenses were treated as torts, privately prosecuted for a damage payment
Verdicts were privately enforced
If you don’t obey the verdict, you get outlawed
It is legal to kill an outlaw, tortious to defend him
So if the defendant ignores the verdict and fights
The coalition against him expands every time someone on the other side is injured
“We’ll intervene to break it up before you have killed more men than you can afford”
For sufficiently serious offenses
You owe a fine and also get outlawed
But you can avoid the outlawry by an out of court settlement
The sagas are histories and historical novels
Written more than seven hundred years ago
From a population of about fifty thousand at the far edge of the world
Ten or more of which are currently in print in English translation

16. Islamic Law Fiqh not Shari’a, at least as I interpret it
Shari’a is law in the mind of God, enforced by God post mortem on everyone
Fiqh, jurisprudence, is the human attempt to implement it as human law
Separation of law and state
The law is deduced by scholars from the Koran and Hadith
Hadith are accounts of things said or done by Mohammed and his companions
Evidence of the sunnah (practice) of the Prophet
Each comes with an isnad, a chain of transmitters
The strength of a hadith depends on the reputation of the transmitters
And the number of separate chains supporting the same hadith.
In Sunni Islam there are four schools of law, mutually orthodox
But disagreeing on details of what rules are deduced from the sources
Mufti and Kadi
A mufti is a jurisconsult, someone who gives advisory opinions on the law (fatwas)
A Kadi is a judge, appointed by the ruler, who tries an actual case
Possibly using information on the law provided by a mufti
Originally, the mufti is “appointed” by reputation, not by an authority
But in the Ottoman empire it eventually becomes an official position
As control over the legal system shifts from the scholars to the state

17. Hadd Law Legal rules with fixed penalty based mostly on the Koran
Five offenses. All require two eye witnesses, except that …
For Zina, intercourse with someone neither your spouse nor concubine
Proof requires four eyewitnesses to the same act of intercourse
The penalty for those who have previously had licit intercourse is stoning to death
False accusation of Zina
Theft
Penalty is having your right hand cut off
But there are a lot of conditions that have to be met for the hadd offense of theft
Drinking wine
Exactly what is covered varies in the views of different schools and scholars
As does the penalty—a fixed number of lashes
Highway robbery (includes breaking into a house with people put in fear)

18. Other Parts of the Law Tazir Jinayat: Killing or injuring someone
Penalty set by the judge at or below the hadd penalty
Weaker requirements of evidence
Jinayat: Killing or injuring someone
Treated as an offense against the victim or his heirs
Prosecuted by them
For first degree murder
Heirs can insist on retaliation
Or accept diya, blood money payment
For lesser versions of killing, only diya
In addition, killer must free a believing slave or fast for two months
Other non-fiqh courts
There are a variety of other courts set up by the ruler
Theoretically in the spirit of, but not bound by, koranic law

19. Jewish Parallels Not surprisingly, a lot of similarity
According to Torah, the disobedient son is to be stoned
But rabbinic scholars read into the text so many conditions
That it is argued that it never has happened or will happen
The hadd offense of theft is treated similarly, although a less extreme case
And the witness requirements for zina, plus penalty for false accusation, makes conviction unlikely
Both systems face the same problems
When God is the legislator, how do you resolve disagreements
Initially, the Great Sanhedrin could resolve disputes by majority vote
When that no longer existed, whatever authorities were accepted—reputation, like the mufti
For a while, the heads of the Babylonian academies
Later scholars such as Maimonides
Communal authorities claimed some power to legislate, like the non-fiqh courts
When God gets it wrong, how do you fix the error?
Interpret around things you don’t like
Or find excuses for additional legislation outside the religious law
Consider the parallels with U.S. constitutional law

20. The Oven of Akhnai (Talmud)
Two schools of rabbinic law: Schools of Hillel and Shamai
For some generations they disagree about the law but get along
Like the Islamic schools of law
Eventually the majority school (Hillel) suppresses the minority
You can argue for your position, but ruling according to it is forbidden
There is a dispute on a technical point between R. Eliezer and the Sages
He gets three miracles in support of his position.
A carob tree is flung a hundred yards away.
“A carob tree has nothing to contribute to the dispute of sages”
A stream runs backwards. “A stream has nothing to contribute …”
The walls start to lean inward. “It is not for the building to interfere in …”
A voice from heaven says on all points R. Eliezer is right
R. Joshua replies: “It is not in heaven”
Eliezer is banned.
A third of the wheat crop, a third of the barley crop, a third of the olive crop burn up
A great wave threatens to sink the ship carrying R. Gamliel, head of the Sanhedrin
“What I did was not for me or my kindred but that your people not be divided”
The wave subsides
Eliezer’s wife is Gamliel’s sister
She forbids Eliezer from falling on his face in petitionary prayer
She is distracted, he does, Gamliel dies
What does the story mean?
Humans have been given control over the law, but why didn’t they change their vote?
Possibly it is a response to the risk of someone claiming his own pipeline to God

21. Eighteenth Century England
Our legal system, without police or public prosecutors
All crimes, except actually against the state (counterfeiting), privately prosecuted
Any Englishman can prosecute any crime
Usually the victim
And essentially all serious crimes were capital
But only a minority of those convicted of such crimes were hanged
Puzzles
Why bear the cost of prosecution? Unlike tort, you don’t collect damages
Why make all offenses capital
Why pardon a majority of those convicted—usually conditional pardons