Transcript 05_Monopoly

Announcements: Tuesday
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Breakout sections: the DeBeers case
Next week: the Dupont case
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Remember to take Quiz 1 on Oncourse
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Announcements: Thursday mng.
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Pd question—no change
Last part of Market failure, missed because of
fire alarm
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Remember to take Quiz 1 on Oncourse
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Next week: the Dupont case
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Announcements: Thursday evng.

PD question---no change
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Remember to take Quiz 1 on Oncourse
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Next week: the Dupont case
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5: Market Power
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What you will learn today...
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Why your company and the government
care about market power
How the government controls market
power
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Market Power
P
P
Demand
5
A business with
market power
Q
Demand
Q
A business with
no market power
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Two ways to increase profit
P
P
Demand
MC0
P0
MC1
Q0
Reduce costs
Q
Demand
P1
P0
MC0
Q1 Q 0
Q
Increase the price
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Sources of Market Power
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________________________
Unique products
________________________
Economies of scale
________________________
Network externalities
________________________
Anti-competitive strategies
________________________
Government entry barriers
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What’s Wrong with Market
Power?
1. _______________________________
1. Customers pay prices above marginal cost, and buy less—
“deadweight
2. _______________________________
loss”
2. Low-cost
3. ________________________________
firms are kept out of the market—bad for them
and consumers both
4._________________________________
3. Higher costs “the lazy monopolist”
4. Rent-seeking
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Two Losses from Monopoly
Price
Monopoly profit
Pmonop
Deadweight loss
Pcomp
MC
Demand
Qmonop Qcomp
Quantity
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What Should the
Government Do About
Monopolies?
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Sometimes monopoly may be unavoidable
because costs are lowest if a single firm
supplies the whole market.
natural monopoly
We call this a _____________________
Examples:_________________________
electricity, telephone service, cable TV,
water to homes
________________________________
_______________________________
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Natural Monopoly
$/Q
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The monopoly price is ___,
5 and
marginal cost is ___,
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P=AC requires a price of ___.
Demand
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Deadweight loss
___________________
10
9
AC
5
MC
500
P=MC
800 900
subsidies Govt. ownership
________
Q
government
failure
_______________
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Rate of Return Regulation:
P=AC
Find the value of the firm’s equity
 Decide a fair rate of return on equity
 Find the firm’s variable costs
 Estimate an output price that gives the
firm the fair rate of return on equity
The rate of return is not guaranteed--only
the price is, for a few years.
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1. Did the sign-in sheet get around?
2. If you answered a question, bring up a
notecard for me.
Which area is deadweight loss?
(a) B+C
P
Pmon
(b) C
(c) C+H
MC
A
B
C
H
G
I
D E
(d) C+D
(e) C+D+H+J
F
L
J
Qmon
K
Demand
Q
Write on a notecard:
What does area
A+B+C+G+H represent?
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Antitrust Law
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Having a monopoly is legal: creating one
without creating social value is not
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Sherman Act (1890): No price-fixing, dividing
up markets, cartels
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Clayton Act (1914): Mergers, exclusive
dealing, tying, bundling, low pricing are illegal
if done to monopolize
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Price fixing is illegal per se
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Sotheby’s and Christie’s auctioneers (2001)
New York city school lunch suppliers (2001)
Oil rig workers (2001) (a private suit)
Those who are hurt by it can sue for treble
damages
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Mergers
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Firms apply for permission to merge
The Justice Department and Federal
Trade Commission ask: Will this merger
substantially lessen competition?
Often firms must divest portions of their
business
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Why Did the
Government Go After
Microsoft?
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Bill Gates in 1994, on anti-trust
law:
"None of the people who run Microsoft's
seven divisions are going to change
what they do or think or forecast.
Nothing. Nothing."
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A Justice Dept. Attorney:
"It was foolish and provocative. It was
like saying, 'I'm going to break the law.
Catch me if you can.' "
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The Justice Department’s
Accusations:
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Bundling Internet Explorer with Windows
and making it hard to use Netscape
Requiring computer makers who bought
Windows for any of their machines to pay a
royalty per machine whether they use
Windows on it or not
Offering AOL to bundle AOL with Windows if
AOL dropped Netscape
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What Happened
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Microsoft decided to fight, not settle the
suit
Judge Jackson found Microsoft guilty
On appeal, the higher court said that
Jackson’s remedy was inappropriate
Settlement proposal: MS will stop using
exclusive contracts and will charge
uniform prices
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