Transcript Regolazione economica

Regulation: Lecture 1
Lecture 2
Natural Monopoly
Optimal pricing
Excess entry
Natural Monopoly
• Monopoly and perfect competition
• When does a single producer has a cost
advantage relative to any other number of
producers?
• The cost fnct. is sub-additive:
Take output levels y’+y”= y* then there is subadditivity iff:
C(y*)< C(y’)+C(y”)
 y’, y”
• Scale economies:
C(y’) < C(y’)
>1
implies decreasing average costs
Natural Monopoly: sub additivity
Economies of scale
are an imprecise
definition for capturing
situations of natural
monopoly: Cost
subadditivity is best
(between ym and
ysa);
A Natural monopoly
situation depends
from technology, but
also from the position
of the demand
function;
Scope economies
• Two goods x and y, define cost function as C(x,
y). C(., .) is sub-additive if, given some output
levels x’, x” ed y’, y”, then:
C (x’+x”, y’+y”)<C(x’, y’)+C(x”, y”)
Scale economies are not necessary, as there
are scope economies;
C (x, y)<C(x)+C(y)
• Scope economies may derive from
– A non rival prod. factor;
– One of the goods results from production of
the other.
Temporary/Permanent Natural Monopoly
• A permanent natural monopoly arises
usually if there are scale economies for
every possible level of production;
• Natural Monopoly can be temporary for at
least two reasons:
1) Demand may shift and the market becomes
large enough for two producers;
2) New tecnologies may diminish the extent of
sub-additivity;
Deadweight costs
DW Costs
• Generic (inverse) linear demand fnct.
p=a-by
• Total revenue:
RT= py = (a-by)y
• Differentiating, marginal revenue:
RM= a – 2by
Elasticity and DW loss.
Costs: efficiency
• Less incentives to efficiency (no stick).
John Hicks ‘the best of mon. profit is a
quiet life’’.
• Cost Inefficiency worsens allocative
inefficiency
• Less incentive to innovation
Monopoly ed efficiency
A different view
•
•
•
•
According to Posner, the costs of mon. are not
so large and we can’t do anything about it:
Redistribution is not so bad;
Deadweight losses estimates are very low and
they may be actually lower as mon. discriminate;
Direct and indirect costs of reg. May be very
large. Regulation is ineffective, may increase
rents;
If reg is effective in reducing profits it destroys
incentives to efficiency.
Contestable Markets
• Contestable when hit and run competition is
possible.
Conditions:
1) No sunk costs;
2) Easy and quick entry is possible;
3) Consumer react instantan. to price differenc.;
4) Incumbent cannot react immed.
• Equilibrium price is average cost, profit are nul
and entry never occurs
• Difficult to trace elements of realism in the theory
although it is a matter of degree.
Marginal Cost pricing
The problem with marginal
cost pricing is that a loss for
the firm must arise if mc is
lower than ac;
How to cover the loss
• By govn. revenue:
– They cause deadweight losses from taxes;
these are proportional to the squared
marginal tax rate;
– Adverse Incentive Effects. Govn. subsidies
always deliver inefficient behaviour, cost
inflation;
– Service is subsidized by non-users;
How to cover the loss
• Non linear pricing
– Two-part tariff: may exclude low quantity
users if surplus is low; This decreases surplus
directly and impede the realization of some
economies of scale; see graph.
– Multipart tariffs. Diminishing marginal utility
– Self-selecting menus of two-part tariff. Low
users may select in low fixed tariff/high
variable tariff, and still participate;
Pricing and alternatives
• Ramsey pricing: optimal distortion of prices in
multiproduct monopoly
(pi -ci)/pi =λ/ηi
for all i’s
Note: monopoly maximization similarity
• Loeb and Magat proposal: transfer the whole
consumer surplus to the monopolist and
auction the right to produce as monopolistHe will maximize welfare. However regulator
need to know the demand fnct.
Sustainable Natural Monopoly: entry
regulation
Why does entry
regulation exists? Maybe
for intrinsic instability of
natural monopoly
configurations with
possible cream
skimming. Suppose in fig
you order the monopolist
to price at (where
demand meets) average
cost. An entrant can
produce ym and sell it
atprice larger than cmin
and get a nice profit.
Entry restrictions: Why?
• Two stage game. 1) entry and bear sunk cost k; 2)
competition in the market, mg cost is constant at c;
• In second stage either monopoly or extreme
competition-price may be c;
• In first stage one or more may enter.
• If one enters then there is monopoly pricing and
inefficiency from DL;
• If more than one enters, then no allocative
inefficiency (mg.cost pricing), but duplication of
fixed cost→ productive inefficiency and instability.
Entry restrictions
• The example above was driven by
extreme competition in the market and
therefore instability;
• But excess entry and welfare loss may
come forth when there’s cournot
competition provided there’s a fixed cost
(although no barriers to entry); Remember
the exc. we solved in Motta.