1. Monopolies and Anti-Trust Regulation
What’s So Bad About Monopolies?
&
What Can We Do About It?

2. How Did It Happen? Monopoly
Firm that is the sole seller of a product without close substitutes
Barriers to entry – prevent firms from entering this market when there are + economic profits
Legal and Cost Barriers
NBA, Medical, Patents (pharmaceutical)
Monopoly resources
Oil, Diamonds, Professional Sports
Government regulation
Comcast
High Cost Barriers to Enter the Market – Aerospace

3. AT&T – A Short History
Alexander Graham Bell patented the telephone in 1876,
formed Bell Telephone which licensed local telephone exchanges in major US cities. AT&T was formed in 1885
In 1913 AT&T became a regulated monopoly.
had to connect competing local companies
And let the Federal Communication Commission (FCC) approve their prices and policies.
All customers rented phones from AT&T, and no other equipment could be attached to the network for fear of "breaking" it.

4. AT&T – A Short History
On January 1, 1984, a court forced AT&T to give up its 22 local Bell companies (Divestiture)
This established seven Regional Bell Operating Companies (RBOC).
Since that time, mergers have reduced the number of RBOCs to four: Verizon (originally Bell Atlantic and Nynex), Qwest (Qwest Communications International took over US West), BellSouth and SBC (originally Southwestern Bell and Pacific Telesys).

5. How Do We “Fix” Monopolies
Lower Barriers to Entry
Goal is to increase competition by allowing more firms to enter the market and compete against each other
AT&T Divestiture (1980)
DOJ and FCC sought to introduce competition into the local phone markets (dominated by 7 RBOCs, “baby bells”)
Required AT&T/RBOCs to lease local wirelines, switching networks, transmission satellites and local household connections at “forward” looking economic costs (which were below historical costs)

6. How Do We “Fix” Monopolies

7. AT&T Before and After the Break-up

8. After the Break Up

9. Colbert on the AT&T Break-Up

10. Why Monopolies Arise The production process Natural monopoly
A single firm can produce output at a lower cost than can a larger number of producers
Natural monopoly
Arises because a single firm can supply a good or service to an entire market
At a smaller cost than could two or more firms
Economies of scale over the relevant range of output

11. Economies of scale as a cause of monopoly1
Economies of scale as a cause of monopoly
Costs
Average total cost
Quantity of output
When a firm’s average-total-cost curve continually declines, the firm has what is called a natural monopoly. In this case, when production is divided among more firms, each firm produces less, and average total cost rises. As a result, a single firm can produce any given amount at the smallest cost

12. Natural Monopoly – Avg Cost Decrease with Increasing Size/Scale of the Firm – Divestiture Raises Avg Cost 6
Average
Total
Cost
ATC in short
run with
small factory
ATC in short
run with
medium factory
ATC in short
run with
large factory
ATC in long run
Economies
of scale
Diseconomies
of scale
$12,000
1,200
10,000
Constant returns to scale
1,000
Quantity of Cars per Day
Because fixed costs are variable in the long run, the average-total-cost curve in the short run differs from the average-total-cost curve in the long run.

13. Solutions to Monopoly “Divestiture” (Sherman Act (1890)
Breaking one big company into a smaller number of “competing” companies
AT&T (1982), Standard Oil (1911)
Telecomm Act (1996)
Allows competitors to access/rent current Telecomm companies network at “forward-looking” costs (best, most efficient technology)
Ignored that: (1) local phone company’s costs based on historical costs to be recovered over 20 years
(2) Residential rates subsidized (below costs)for universal service – higher costs business rates
Lecture notes:
1982:
AT&T was split up into eight smaller companies after spending over $300 million defending itself from lawsuits and antitrust legislation.
1911:
Standard Oil controlled 91% of production and 85% of final sales of oil in the United States in In 1909, the Department of Justice sued the company for violating the Sherman Act. In 1911, the company was forced to break up into 34 independent companies with different boards of directors. The biggest two companies were Exxon and Mobil.
Reducing trade barriers:
Text: The Constitution reads, “No State shall, without the consent of Congress, lay any imposts or duties on imports or exports.” Rarely have so few words been more profound. With this simple law in place, states must compete on equal terms.
In addition, if we eliminate trade quotas and tariffs, international firms may force domestic producers to become more competitive, which will reduce monopoly power.

14. The New Market - Wireless

15. Wireless Customers- by Carrier

16. And Then There is Comcast & Time-Warner – Cable Companies

17. And Then There is Comcast & Time-Warner

18. Monopolies – Antitrust Law
Increasing competition with antitrust laws
Sherman Antitrust Act, 1890
Reduce the market power of trusts
Clayton Antitrust Act, 1914
Strengthened government’s powers
Authorized private lawsuits
Prevent mergers
Break up companies
Prevent companies from coordinating their activities to make markets less competitive

19. Public Policy Toward Monopolies
Regulation
Regulate the behavior of monopolists
Price – don’t allow P > MC
Issue – Firms have all of the data on their prices – may not disclose accurate information
Common in case of natural monopolies
Marginal-cost pricing
May be less than ATC
No incentive to reduce costs