Monopoly regulation SFLS online

I.) Perfect competitionII.) Monopolistic competitionIII.) OligopolyIV.) Monopoly

Market Structure

Some regulations

IV.) Monopoly RegulationSummary of some of the problems of

monopolies...Rent Seekingis the act of obtaining special

treatment by the government to create economic profit or to divert 挪用 consumer surplus or producer surplus away from others.

Rent seeking does not always create a monopoly, but it always restricts competition and often creates a monopoly.


monopolies...Rent SeekingMonopolies that are profit

maximizing are not producing enough from a society’s perspective and they are charging too high of a price

Inefficient Market Outcomes

Q

P

D

MR

MCATC

Abnormal profit - YES

Productively - NOEfficient (Q = min ATC )

Allocatively - NOEfficient ( P = MC )

IV.) Monopoly Welfare Analysis

***Monopolies that are profit maximizing are not producing enough from a society’s perspective and they are charging too high of a price


monopolies...Rent Seeking

Though it can mean more is produced in the market, it often is seen that monopolies are taking advantage of those less fortunate

Inefficient Market Outcomes

Price Discrimination

歧视 Discrimination: treating people differently based on some characteristic, e.g. race or gender.

The characteristic used in price discrimination is willingness to pay (WTP):

A firm can increase profit by charging a higher price to buyers with higher WTP.

IV.) Monopoly Power

Price Discrimination: selling the same good at different prices to different buyers.

It is sometimes possible for a monopoly to charge different people difference prices

What can public policy do about the problems and issues that occur with monopolies?

There are three common answers…

- Public Ownership- Price Regulation and Anti- Trust Laws- Do nothing- Give them a Subsidy

IV.) Monopoly Regulation

the good is supplied by the government or by a firm owned by the government.

IV.) Monopoly Regulation- Public Ownership- Price Regulation and Anti- Trust Laws- Do nothing- Give them a Subsidy

Some companies can do things cheaper being large and we typically

think governments can do this best (but do they?)





Airlines are often oligopolistic and not monopolies, but can act like monopolies and are

often regulated for safety and prices

The Good:

- Can prevent unfair price discrimination and monopoly profit seeking that hurts consumers and also create more output that a profit maximizing firm might not do.

IV.) Monopoly Regulationthe good is supplied by

the government or by a firm owned by the government.


The Good:- Can prevent unfair price discrimination and monopoly

profit seeking that hurts consumers and also create more output that a profit maximizing firm might not do. The Bad:- Often poorly run, no profit motive,

can be very inefficient and end up performing worse.

- Sometimes doing nothing is better.


- No desire to innovate even if they have the ability.

the good is supplied by the government or by a firm owned by the government.

Public Ownership

Rent Seekingis the act of obtaining special

treatment by the government to create economic profit or to divert consumer surplus or producer surplus away from others.


IV.) Monopoly and Competition

Rent Seeking behavior is just another fancy word

for Corruption

Rules that control the prices that monopolies can charge or will break them into smaller companies so they will lose their monopoly power.

Most common strategy used in the U.S.


Rules that control the prices that monopolies can charge or will break them into smaller companies so they will lose their monopoly power.

The Good:- Can prevent price discrimination,

break up monopolies and benefit consumers and give them more choices.


Price Regulations and Anti-Trust Laws

Rules that control the prices that monopolies can charge or will break them into smaller companies so they will lose their monopoly power.The Good:

- Can prevent price discrimination, break up monopolies and benefit consumers and give them more choices.

The Bad:- Price controls are hard to

determine and sometimes hurt monopolies too much.

- Best answer is usually to break up the monopoly.


Rent Seeking is the act of obtaining special treatment by the government to create economic profit or to divert consumer surplus or producer surplus away from others.



Problem behavior that will come up again and

again…

Two most commonly used price controls

IV.) Monopoly RegulationWith private companies selling

durable goods, it is most common to break up the company somehow.

With other private companies or even publicly owned companies that produce a service such as, utilities like water and power, price controls are usually more common.

1. Socially optimized pricing also called Marginal cost pricing2. Fair return pricing also called Cost of Service regulations


They are owned publicly and prices are regulated to prevent abnormal profits

make only a normal profit

They are owned publicly and prices are regulated

to prevent abnormal profits make only a

normal profit

They are owned publicly and prices are regulated

to prevent abnormal profits make only a

normal profit

Q

P

D = P

MR

MCATC

IV.) Monopoly Welfare Analysis

*** Depending on the curves the monopoly can actually lose money in this case and can cause the monopoly to go bankrupt and shut down so this one is rarely used today.

A price ceiling that it is allocatively efficient for society

Socially optimal price

P = MC

A price that would be like if it was a perfectly competitive firm

IV.) Regulated Monopoly

Q

P

D =P

MR

MC ATC

*** Depending on the curves the monopoly can actually lose money in this case and can cause the monopoly to go bankrupt and shut down so this one is rarely used today.

A price ceiling that it is allocatively efficient for society

Socially optimal price

P = MCLoss

A price that would be like if it was a perfectly competitive firm

IV.) Monopoly Regulation1. Socially optimized pricing also called Marginal cost

pricing

The Good:- It is allocatively efficient, more is

produced at a lower price for everyone.The Bad:

- The price is so low that most monopolies would go out of business, so the government would have to give them a subsidy.

- A price that would be like if it was a perfectly competitive firm


Q

P

D = P

MR

MC ATC

*** More then a monopoly would like to produce and less then society would like to have. Most common way to regulate a monopoly since they still get a normal profit.

A price ceiling that it is productively efficient, though not allocatively efficient for society and still allows the monopoly to get at least a normal profit

Fair return price

P = ATC


The Good:- The output is higher and the price

is lower then an unregulated monopoly.

- The firm would still get a normal profit so a subsidy is usually not needed.

2. Fair return pricing also called Cost of Service

regulations


The Good:

- It is productively efficient, the output is higher and the price is lower then an unregulated monopoly.

- The firm would still get a normal profit so a subsidy is usually not needed.The Bad:

- It may still be not enough output or low enough prices for society’s desires. Also calculating the price is very difficult and inefficient and prone 倾向于 to rent seeking.

2. Fair return pricing also called Cost of Service

regulations

Monopoly outcomes may seem unfair but alternatives might have untended consequences or make the problem worse


Rent Seeking is the act of obtaining special treatment by the government to create economic profit or to divert consumer surplus or producer surplus away from others.



By doing something, you promote more of this behavior in trying to make the new rules in your favor


Monopolies usually don’t produce enough of what society wants, mostly because it is not profitable for them. One market oriented solution to get the to produce more is to make it more profitable for them.

This basically means that the government gives them money to produce more.

Examples are: water company, power company, many public goods.

IV.) Monopoly RegulationSome goods and services are considered natural monopolies

and are the best way to provide people what they desire.

In the case of the electric company, it is most desirable to produce as much as possible (allocative efficiency) and not necessarily worry about profit, even though they still must cover their costs.

1. Lump Sum Subsidies (can be a bad idea)2. Subsidies per Unit (usually a better idea)

To get the monopoly to produce more (and not price discriminate) the government will have to pay the monopoly to do so.

Two ways to do so:


A one time payment to the monopoly to do with as they wish.

This only affects fixed costs

AFCATC

1. Lump Sum Subsidies

(can be a bad idea)2. Subsidies per Unit (usually a better idea)

Q

P

D

MR

MCATC


One time payment that only effects fixed costs.

Lump Sum

ATCAFC

ATC

Before subsidy

Q

P

D

MR

MCATC

The output stays the same, it’s just now that the costs are lower. To produce more what is needed is the shift the marginal cost line to the right.


One time payment that only effects fixed costs.

Lump Sum

ATCAFC

ATC 1

After subsidy


A subsidy on each unit produced.

This affects variable costs and marginal costs

ATCAVCMC

1. Lump Sum Taxes (can be a bad idea)

2. Subsidies per Unit (usually a better idea)

Q

P

D

MR

MCATC


Before subsidy

Q

P

D

MR

MCATC


Subsidy on each unit produced

Per Unit Subsidy

ATCAVC

MC

ATC1

MC1

Before subsidy

Q

P

D

MR

MCATC

The idea is that the firm is still producing at the profit maximizing point but that the output is now higher, as well as costs being lower for everyone that is not price discriminated against.



Per Unit Subsidy

ATCAVC

MC

ATC1MC1

After subsidy

Q

P

D

MR

MCATC

The idea is that the firm is still producing at the profit maximizing point but that the output is now higher, as well as costs being lower for everyone that is not price discriminated against.



Per Unit Subsidy

ATCAVC

MC

ATC1MC1

After subsidyQ1

So a little summary…



Price Discrimination - Good for Society as more is produced

Capturing Economies of Scale-Economies of scale can lead to natural monopoly.-It is more efficient to regulate natural monopoly than to break it up and make the industry competitive.

Strengthening the Incentives to Innovate- Monopoly might be more innovative than competition.-Innovation can create a monopoly.

Benefits of a Monopoly


Price Discrimination - Bad for consumers and high prices

Not efficient from a society’s perspective - Does not produce as much as people want

Loses the Incentives to Innovate -Monopoly might not innovate because it doesn’t have to.

Downsides of a Monopoly

Summarizing some of regulations to solve downsides



Summarizing some of this



The Good: The Bad:

- prevent unfair price discrimination

- Often poorly run, no profit motive, can be very inefficient and end up performing worse.




The Good: The Bad:

- prevent unfair price discrimination

- Price controls are hard to determine and sometimes hurt monopolies too much.




The Good: The Bad:

Sometimes doing nothing is better, that the solutions could be worse

Doesn’t solve the problem at hand




The Good: The Bad:

Per unit subsidies can increase output in the market

Lump sum subsidies might not increase output in the market

That’s all for nowThanks

Education

Monopoly regulation SFLS online