Ch. 15 Public Policy Toward Monopoly

• Produce less Q than socially effic. • P> MC• NOT PROFITS

The Monopoly’s Profit: A Social Cost?

1. Create more competitionA. 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 trustsb. 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

4 Govt. Responses to Monopoly

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’si. Post office ii. Water/electric in Europeb. 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 profitii. 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

PRICE DISCRIMINATION

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 = …- zeroFigure 15-10

Examples Movie tixAirlines Coupons Financial AidQuantity Discounts

-Buy 1 for $1 or 6 for $5