Transcript Chapter 10

Chapter 10
Monopoly and other forms
of imperfect competition
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings
Slides prepared by Nahid Khan
10-1
Imperfect competition
• Perfect competition
–
–
–
–
Firms have no control over price.
Firms produce homogenous products.
Price equal the marginal cost of production.
Long-run economic profits are not possible due to free
entry and exit.
– An ideal market that maximises economic surplus.
– A situation that does not always exist.
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings
Slides prepared by Nahid Khan
10-2
Imperfect competition
• Imperfectly competitive firms
–
–
–
–
–
–
–
Have some control over price.
Price may be greater than the cost of production.
Long-run economic profits are possible.
Face a downward-sloping demand curve.
Contribute to loss of efficiency.
Are very common in every economy.
Reduce economic surplus to varying degrees by
restricting output.
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings
Slides prepared by Nahid Khan
10-3
Imperfect competition
• Different forms of imperfect competition
– Pure monopoly
– Oligopoly
– Monopolistic competition
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings
Slides prepared by Nahid Khan
10-4
Imperfect competition
• Various forms of imperfect competition
– Pure monopoly (most inefficient)
 The only supplier of a unique product with no close
substitutes, examples
• City power provider
• Only petrol station in a small town
• AFL football league
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings
Slides prepared by Nahid Khan
10-5
Imperfect competition
• Various forms of imperfect competition
– Oligopoly (more efficient than a monopoly)
 A firm that produces a product for which only a few rival
firms produce close substitutes, examples
• Major banks in Australia
• BP, Shell, Mobil
• Airlines
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings
Slides prepared by Nahid Khan
10-6
Imperfect competition
• Different forms of imperfect competition
– Monopolistic competition (closest to perfect competition)
 A large number of firms that produce slightly differentiated
products that are reasonably close substitutes for one
another, examples
• Restaurants in Lygon Street
• Novels, films, CDs
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings
Slides prepared by Nahid Khan
10-7
Imperfect competition
• The essential difference between perfectly and
imperfectly competitive firms comes from possible
substitutability of products
– The perfectly competitive firm faces a perfectly elastic
demand for its product.
– The imperfectly competitive firm faces a downwardsloping demand curve.
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings
Slides prepared by Nahid Khan
10-8
Imperfect competition
• In perfect competition
– Supply and demand determine equilibrium price. The firm
has no market power.
– At the equilibrium price, the firm sells all it wishes.
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings
Slides prepared by Nahid Khan
10-9
Imperfect competition
• With perfect competition
– If the firm raises its price, sales will be zero.
– If the firm lowers its price, sales will not increase.
– The firm’s demand curve is the horizontal line at the
market price.
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings
Slides prepared by Nahid Khan
10-10
Imperfect competition
• With imperfect competition
– The firm has some control over price or some market
power.
– The firm faces a downward-sloping demand curve.
– In the case of a monopoly, the firm’s demand curve is the
market demand curve.
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings
Slides prepared by Nahid Khan
10-11
The demand curves facing perfectly and
imperfectly competitive firms
Market
price
Imperfectly competitive firm
D
Price
$/unit of output
Perfectly competitive firm
D
Quantity
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PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings
Slides prepared by Nahid Khan
Quantity
10-12
Five sources of market power
• Exclusive control over inputs
 A singer with gifted talent
• Government-created monopolies
 A new pharmaceutical drug
 Taxi licenses
• Economies of scale (natural monopolies)
 City water supply
• Network economies
 Microsoft Windows
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PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings
Slides prepared by Nahid Khan
10-13
Economies of scale and the
importance of fixed costs
• Firms with large fixed costs and low variable costs
– Have low marginal costs
– Average total cost declines sharply as output increases
– Have higher proportion of fixed cost than variable cost in
average total cost
– Economies of scale will exist
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings
Slides prepared by Nahid Khan
10-14
Total and average total costs for a
production process with economies of
scale
Average cost ($/unit)
Total cost ($/year)
TC = F + MQ
F + Q0
F
ATC = F/Q + M
M
Q0
Quantity
Total cost rises at a constant
rate as output rises
Quantity
Average costs decline and is
always higher than marginal cost
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings
Slides prepared by Nahid Khan
10-15
Costs for two computer game producers (1)
Nintendo
PlayStation
Annual production
1,000 000
1,200 000
Fixed cost
$200 000
$200 000
Variable cost
$800 000
$960 000
$1,000 000
$1,160 000
Total cost
Average total cost per game
$1.00
$0.97
Observations
• Fixed costs are a relatively small share of total cost.
• Cost/game is nearly the same.
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings
Slides prepared by Nahid Khan
10-16
Costs for two computer game producers (2)
Nintendo
Annual production
Fixed cost
1,000 000
1,200 000
$10,000 000
$10,000 000
$200 000
$240 000
$10,200 000
$10,240 000
Variable cost
Total cost
Average total cost per game
PlayStation
$10.20
$8.53
Observations
• Fixed costs are a relatively large share of total cost.
• PlayStation has a $1.67 average cost advantage.
• PlayStation can lower prices, cover cost and attract customers.
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings
Slides prepared by Nahid Khan
10-17
Costs for two computer game producers (3)
Nintendo
Annual production
PlayStation
500 000
1,700 000
$10,000 000
$10,000 000
$100 000
$340 000
Total cost
$10,100 000
$10,340 000
Average total cost per game
$20.20
Fixed cost
Variable cost
•
•
•
•
$6.08
Shift of 500,000 units to PlayStation.
Nintendo’s average cost increases to $20.20/unit.
PlayStation average cost falls to $6.08.
A large number of firms cannot survive when the cost differential is
high.
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings
Slides prepared by Nahid Khan
10-18
Economies of scale and the importance
of fixed costs
• Fixed investment in research and development
has been increasing as a share of production
costs.
Cost of producing a computer
Fixed cost
Software
1984
1990
20%
80%
Copyright  2007 McGraw-Hill Australia Pty Ltd
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Variable cost
Hardware
80%
20%
10-19
Economies of scale and the importance
of fixed costs (cont.)
• Thinking as an economist
– Why does Intel sell the overwhelming majority of
microprocessors used in personal computers?
• As fixed costs become more important, the
perfectly competitive pattern becomes less
common.
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings
Slides prepared by Nahid Khan
10-20
Profit maximisation for the monopolist
• A price taker (perfect competition) and a price
setter (imperfect competition) share two economic
goals. They want
– to maximise profits
– to select the output level that maximises the difference
between TR and TC, where MR = MC.
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Slides prepared by Nahid Khan
10-21
Profit maximisation for the monopolist
• Marginal revenue for the monopolist
– Firms in perfect competition and monopoly firms
(assuming a single price firm)
 Both increase output when MR > MC.
 Calculate MC the same way.
 Do not have the same MR at a given price.
• In perfect competition: MR = P
• In monopoly: MR < P
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings
Slides prepared by Nahid Khan
10-22
The monopolist’s benefit from selling an
additional unit
•
•
•
•
Price ($/unit)
8
If P = $6, then TR = $6 x 2 = $12
If P = $5, then TR = $5 x 3 = $15
The MR of selling the 3rd unit = $3 (15-12)
For the 3rd unit, MR = $3 < P = $5
6
5
D
2
3
8
Quantity (units/week)
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Slides prepared by Nahid Khan
10-23
Marginal revenue in graphical form
• Observations
P
Q
TR
MR
6
2
12
5
3
15
4
4
16
1
3
5
15
-1
3
– MR declines as quantity
increases.
– MR is the change between two
quantities.
– MR < P because price must be
lowered to sell an additional
unit.
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings
Slides prepared by Nahid Khan
10-24
P
Q
TR
MR
6
2
12
5
3
15
4
4
16
1
3
5
15
-1
3
Price & marginal revenue ($/unit)
Marginal revenue in graphical form
8
3
D
1
2
-1
3
4
5
8
MR
Quantity (units/week)
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PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings
Slides prepared by Nahid Khan
10-25
The marginal revenue curve for a monopolist
with a straight-line demand curve
Price
a
a/2
D
MR
Q0/2
Q0
Quantity
Observations
• The vertical intercept, a, is the same for MR and D.
• The horizontal intercept for MR, Q0/2, is one half the demand
intercept, Q0..
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings
Slides prepared by Nahid Khan
10-26
Profit maximisation for the monopolist
• Profit maximising decision rule:
– When MR > MC, output should be increased.
– When MR < MC, output should be reduced.
– Profits are maximised at the level of output for which
MR = MC.
– Set the price that consumers are willing to pay at that
level of output.
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings
Slides prepared by Nahid Khan
10-27
The monopolist’s profit-maximising
output level
Marginal cost
Price ($/unit of output)
6
Observations
• If P = $3 & Q = 12 MR < MC
and output should be
reduced.
• Profits are maximised at 8
units where MR = MC.
• The maximum single price at
which 8 units can be sold is
P=$4.
4
3
2
MR
8
12
D
24
Quantity (units/week)
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings
Slides prepared by Nahid Khan
10-28
Even a monopolist may suffer an economic
loss
Being a monopolist doesn’t guarantee an economic profit
Economic loss
= $400 000/day
Economic profit
= $400 000/day
0.10
ATC
MC
0.05
Price ($/minute)
Price ($/minute)
0.12
0.10
0.08
ATC
MC
0.05
D
20
MR
Minutes (millions/day)
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D
20
MR
24
Minutes (millions/day)
10-29
The demand and marginal cost curves for a
monopolist
Why the invisible hand breaks down under monopoly
Price ($/unit of output)
6
Marginal cost
The socially optimal
amount occurs where
MC = D(MR) at 12 units
3
D
12
24
Quantity (units/week)
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings
Slides prepared by Nahid Khan
10-30
The demand and marginal cost curves for a
monopolist (cont.)
Why the invisible hand breaks down under monopoly
Price ($/unit of output)
6
Marginal cost
• The profit maximising level of
output of 8 units, where MR =
MC, is less than the socially
optimal output of 12.
• Between 8 and 12, MB to
society > MC to society.
• Single-price monopolist will not
increase output because
MR<MC.
4
3
2
MR
8
12
D
24
Quantity (units/week)
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings
Slides prepared by Nahid Khan
10-31
The demand and marginal cost curves
for a monopolist (cont.)
Why the invisible hand breaks down under monopoly
Price ($/unit of output)
6
Marginal cost
Deadweight loss
• Because MR < P, the monopoly
produces less than the socially
optimal amount
• The deadweight loss of the
monopoly to society =
(1/2)($2/unit)(4units/wk) = $4/wk.
4
3
2
MR
8
12
D
24
Quantity (units/week)
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings
Slides prepared by Nahid Khan
10-32
Why the invisible hand breaks down
under monopoly
• Monopoly
– Profits are maximised
where MR = MC
– P > MR
– P > MC
– Deadweight loss
• Perfect competition
– Profits are maximised
where MR = MC
– P = MR
– P = MC
– No deadweight loss
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings
Slides prepared by Nahid Khan
10-33
Why the invisible hand breaks down
under monopoly (cont.)
• Difficulties in reducing the deadweight loss of
monopolies
– Enforcing competition and anti-monopoly laws
– Patents, copyrights and innovation
– Natural monopolies
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Slides prepared by Nahid Khan
10-34
Using discounts to expand the market
• Price discrimination
– The practice of charging different buyers different prices
for essentially the same good or service, where
differences do not simply reflect differences in costs of
supplying different buyers.
• Examples of price discrimination
– Senior citizens and student discounts on movie tickets
– Supersaver discounts on air travel
– Rebate coupons
Copyright  2007 McGraw-Hill Australia Pty Ltd
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Slides prepared by Nahid Khan
10-35
Using discounts to expand the market
(cont.)
• Thinking as an economist
– Why do many movie theatres offer discount tickets to
students?
– Why do most airlines have peak and off-peak rates?
– Why do fitness clubs have a membership fee and per unit
price?
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings
Slides prepared by Nahid Khan
10-36
Using discounts to expand the market
(cont.)
• Example
– Rosie can edit term papers for eight students each
with a different reservation price. If Rosie’s
opportunity cost of her time to edit each paper is
$29 and she must charge a single price to each
student, how many term papers should Rosie edit?
How much economic profit would she make?
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings
Slides prepared by Nahid Khan
10-37
Total and marginal revenue from editing
Student
Reservation price
($ per paper)
Total revenue
($ per week)
Marginal revenue
($ per paper)
A
40
40
40
B
38
76
36
C
36
108
32
D
34
136
28
E
32
160
24
F
30
180
20
G
28
196
16
H
26
208
12
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings
Slides prepared by Nahid Khan
10-38
Using discounts to expand the market
• Example
– How many manuscripts should Rosie edit when
she must charge all buyers the same amount?
 Opportunity cost = $29
 TR = P x Q, or for 4 papers, 4 x $34 = $136/wk
 MR is the difference in TR from adding another
student
 If MR > MC: increase output
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings
Slides prepared by Nahid Khan
10-39
Why the invisible hand breaks down
under monopoly
• Example
– How many manuscripts should Rosie edit?
 Rosie edits 3 papers
•
•
•
•
TC = 3 x $29 = $87
TR = $108
Economic profit = $108 - $87 = $21/wk
Accounting profit = $108
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings
Slides prepared by Nahid Khan
10-40
Why the invisible hand breaks down
under monopoly
• Example
– How many manuscripts should Rosie edit?
 Opportunity cost = $29
 Must charge the same price
 Reservation price > opportunity cost for student
A to F
 Socially efficient number is 6
•
•
•
•
TR = 6 x $30 = $180
TC = 6 x $29 = $174
Economic profit = $180- $174 = $6
Accounting profit = $180
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings
Slides prepared by Nahid Khan
10-41
Why the invisible hand breaks down
under monopoly
• Example
– If Rosie can price discriminate, how many papers
should she edit?
 Assume Rosie can charge each student their
reservation price.
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Slides prepared by Nahid Khan
10-42
Example
Reservation
Student
A
40
B
38
C
36
D
34
E
32
F
30
G
28
H
26
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price
•
•
•
•
Rosie would edit A to F
TR = $40 + $38… = $210
TC = 6 x $29 = $174
Economic Profit = $210 $174 = $36/wk
• Economic profit is $30
more than when she had
to charge a single price.
10-43
Using discounts to expand the
market
• Perfectly discriminating monopolist
– Charging each buyer exactly their reservation price




Economic surplus is maximised
Consumer surplus is zero
Economic surplus = producer surplus
No deadweight loss
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings
Slides prepared by Nahid Khan
10-44
Using discounts to expand the
market (cont.)
• Limitations to perfect price discrimination
– Seller will not know each buyer’s reservation price.
– Low price buyers could resell to other buyers at a higher
price.
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings
Slides prepared by Nahid Khan
10-45
Using discounts to expand the
market (cont.)
• Group pricing
– A form of price discrimination where different discounts
are offered in different submarkets, while members of
particular submarket all receive the same discount.
– Group pricing essentially allows a firm to divide its market
into two submarkets in which it can charge two different
prices.
– In each market the firm can charge the same price to
every buyer like an ordinary monopolist.
– Therefore the firm should keep expanding output in each
submarket as long as MR in that submarket exceeds MC.
Copyright  2007 McGraw-Hill Australia Pty Ltd
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10-46
Using discounts to expand the
market (cont.)
• Group pricing
– Question: Suppose Rosie knows that students whose
reservation prices are at least $34 are science students,
while those whose reservation prices are below $34 are
commerce students. How much should Rosie charge for
editing if she uses group pricing?
Copyright  2007 McGraw-Hill Australia Pty Ltd
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Slides prepared by Nahid Khan
10-47
Using discounts to expand the
market (cont.)
• The hurdle method of price discrimination
– The practice by which a seller offers a discount to all
buyers who overcome some obstacle.
– Examples:
 Rebate coupon
 Bundling of goods
 Foregoing extras that come with a higher price
Copyright  2007 McGraw-Hill Australia Pty Ltd
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10-48
Using discounts to expand the
market (cont.)
• The hurdle method of price discrimination is used
to solve two problems:
– Seller does not know the reservation prices.
– Seller must separate high and low price buyers.
Copyright  2007 McGraw-Hill Australia Pty Ltd
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10-49
Using discounts to expand the
market (cont.)
• A perfect hurdle
– Completely segregates buyers whose reservation prices
lie above it from others whose reservation prices lie
below it, imposing no cost on those who jump the hurdle.
• What do you think?
– Is a perfect hurdle possible?
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings
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10-50
Using discounts to expand the
market (cont.)
• Question
– How much should Rosie charge for editing if she uses a
perfect hurdle?
• Assume
– Rosie offers a mail in rebate coupon.
– Students with at least a $36 reservation price never use
the coupon.
– Students with a reservation price below $36 use the
coupon.
– Opportunity cost = $29.
– Discount coupon = $4.
Copyright  2007 McGraw-Hill Australia Pty Ltd
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10-51
Price discrimination with a perfect hurdle
Student
Reservation price
($ per paper)
Total revenue
($ per week)
Marginal revenue
($ per paper)
List price submarket
A
40
40
40
B
38
76
36
C
36
108
32
Discount price submarket
D
34
34
34
E
32
64
30
F
30
90
26
G
28
112
22
H
26
130
18
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings
Slides prepared by Nahid Khan
10-52
Using discounts to expand the
market (cont.)
• Solution
– TR = (3)(36) + (2)(32) = $172
– MC = ($5)($29) = $145
– Economic profit = $27/wk
• Question
– Is price discrimination a desirable thing?
 The hurdle method raised economic surplus.
Copyright  2007 McGraw-Hill Australia Pty Ltd
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Slides prepared by Nahid Khan
10-53
Using discounts to expand the market (cont.)
Calculating economic surplus
Consumer surplus
Both
Single price
& discount
Reservation price
A
B
C
Actual price
$40
$38
$36
$36
$36
$36
$34
With discount
•
$4
$2
$0
$6
Without discount
D
Consumer surplus
$22
$2
$8
Producer surplus
– Single price = 3(36 - 29) = $21/wk
– Discount price = 3(36 - 29) = $21/wk
2(32 - 29) = $6/wk
$27/wk
Copyright  2007 McGraw-Hill Australia Pty Ltd
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Slides prepared by Nahid Khan
10-54
Using discounts to expand the market
(cont.)
• Question
– Is Rosie’s discount rebate socially efficient?
Copyright  2007 McGraw-Hill Australia Pty Ltd
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10-55
Using discounts to expand the
market (cont.)
• Examples of price discrimination
–
–
–
–
–
Temporary sales
Book publishers and paperback books
Automobile producers offer various models
Commercial air carriers
Movie producers
Copyright  2007 McGraw-Hill Australia Pty Ltd
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Slides prepared by Nahid Khan
10-56
Using discounts to expand the
market (cont.)
• Thinking as an economist
– Why might an appliance retailer instruct its salespeople to
hammer dents into the sides of its stoves and
refrigerators?
Copyright  2007 McGraw-Hill Australia Pty Ltd
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Slides prepared by Nahid Khan
10-57
Using discounts to expand the
market (cont.)
• Summary
– Single price monopolies are inefficient because P > MR.
– The hurdle method of price discrimination reduces the
inefficiency.
– Hurdles are not perfect, therefore, there will be some
efficiency loss.
– The more finely the seller can discriminate, the smaller
the efficiency loss.
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings
Slides prepared by Nahid Khan
10-58
Public policy towards competition
• National competition policy
– Competitive markets will generally serve the interests of
consumers.
– Wider community can provide strong incentives for
suppliers.
– Promote efficiency and innovation.
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings
Slides prepared by Nahid Khan
10-59
Public policy towards competition
(cont.)
• The Trade Practices Act and the ACCC
– Promotion of competition and fair trading
– Provision of consumer protection
• Thinking as an economist
– How does the ACCC use cost-benefit thinking in applying
the Act’s authorisation and notification processes?
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings
Slides prepared by Nahid Khan
10-60
Public policy towards competition
(cont.)
• Regulating natural monopolies
– State ownership, marginal cost pricing versus the cost of
less incentive for innovation
– Exclusive contracting for natural monopoly
 Competition for the contract sets P = MC
 Difficulty when fixed costs are high such as electric utilities
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings
Slides prepared by Nahid Khan
10-61
Public policy toward natural monopoly
• Regulating natural monopolies in Australia
• Abandoned direct regulation
• Incentive compatible regulatory regimes such as
price caps
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings
Slides prepared by Nahid Khan
10-62
Public policy toward natural monopoly
(cont.)
• What do you think?
– Should we regulate natural monopolies?
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings
Slides prepared by Nahid Khan
10-63