Monopoly and Other Forms of Imperfect Competition MB
Monopoly and Other Forms of Imperfect Competition MB MC
MB MC Imperfect Competition n Imperfectly Competitive Firms Have some control over price l Price may be greater than the cost of production l Long-run economic profits are possible l Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 2
MB MC Imperfect Competition n Perfect Competition An ideal market that maximizes economic surplus l A situation that does not always exist l Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 3
MB MC Imperfect Competition n Imperfectly Competitive Markets Reduce economic surplus to varying degrees l Are very common l Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 4
MB MC Imperfect Competition n Different Forms of Imperfect Competition l Pure Monopoly (most inefficient) u The only supplier of a unique product with no close substitutes Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 5
MB MC Imperfect Competition n Different Forms of Imperfect Competition l Monopolistic Competition (closest to perfect competition) u. A large number of firms that produce slightly differentiated products that are reasonably close substitutes for one another u Long-run adjustment to zero economic profits u Importance of differentiation Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 6
MB MC Imperfect Competition n Different Forms of Imperfect Competition l Oligopoly (more efficient than a monopoly) u Industry structure in which a small number of large firms produce products that are either close or perfect substitutes u Cost advantages from large size may prevent the long-run adjustment to zero economic profit u Undifferentiated and differentiated products Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 7
MB MC Imperfect Competition n The Essential Difference Between Perfectly and Imperfectly Competitive Firms The perfectly competitive firm faces a perfectly elastic demand for its product. l The imperfectly competitive firm faces a downward-sloping demand curve. l Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 8
MB MC Imperfect Competition n In perfect competition: Supply and demand determine equilibrium price. The firm has no market power. l At the equilibrium price, the firm sells all it wishes. l Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 9
MB MC Imperfect Competition n With perfect competition: If the firm raises its price, sales will be zero. l If the firm lowers its price, sales will not increase. l The firm’s demand curve is the horizontal line at the market price. l Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 10
MB MC Imperfect Competition n With imperfect competition: The firm has some control over price or some market power. l The firm faces a downward sloping demand curve. l Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 11
MB MC The Demand Curves Facing Perfectly and Imperfectly Competitive Firms D Market price Imperfectly competitive firm Price $/unit of output Perfectly competitive firm D Quantity Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Quantity Slide 12
MB MC Five Sources of Market Power n Market Power l A firm’s ability to raise the price of a good without losing al its sales Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 13
MB MC Five Sources of Market Power n n n Exclusive control over inputs Patents and Copyrights Government Licenses or Franchises Economies of Scale (Natural Monopolies) Network Economies Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 14
MB MC n Economies of Scale and the Importance of Start-Up Costs Firms with large fixed costs and low variable costs: Have low marginal costs l Average total cost declines sharply as output increases l Economies of scale will exist l Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 15
MB MC Total and Average Total Costs for a Production Process with Economies of Scale Average cost ($/unit) Total cost ($/year) TC = F + MQ 0 F ATC = F/Q + M M Q 0 Quantity Total cost rises at a constant rate as output rises Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Quantity Average costs decline and is always higher than marginal cost Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 16
Costs for Two Computer Game Producers (1) MB MC Nintendo Playstation Annual production 1, 000 1, 200, 000 Fixed cost $200, 000 Variable cost $800, 000 $960, 000 Total cost $1, 000 $1, 160, 000 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 c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 17
MB MC Costs for Two Computer Game Producers (2) Nintendo Playstation Annual production 1, 000 1, 200, 000 Fixed cost $10, 000 Variable cost $200, 000 $240, 000 Total cost $10, 200, 000 $10, 240, 000 Average total cost per game $10. 20 $8. 53 Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 18
MB MC Costs for Two Computer Game Producers (2) CT = Cvu*q+CF = CMA*q+CF RT = p*q CME= CMA + CF/q Break even analysis RT = CT CMA*q+CF = p*q q = CF/(p-CMA) = Fixed cost/Margin Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 19
MB MC n 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 Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Variable Cost Hardware 20% 80% Chapter 10: Monopoly and Other Forms of Imperfect Competition 80% 20% Slide 20
MB MC n Economies of Scale and the Importance of Fixed Costs Economic Naturalist l How big will Playstation’s unit cost advantage be if it sells 2, 000 units per year, while Nintendo sells only 200, 000? Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 21
MB MC n Profit Maximization for the Monopolist A price taker (perfect competition) and a price setter (imperfect competition) share two economic goals. They want: To maximize profits l To select the output level that maximizes the difference between TR and TC, where MB= MC. l Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 22
MB MC n Profit Maximization for the Monopolist For a producer l MB = Marginal Revenue (MR) or a change in a firm’s total revenue that results from a one-unit change in output Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 23
MB MC n Profit Maximization for the Monopolist Marginal Revenue for the Monopolist l Perfect competition and monopolies u Both increase output when MR > MC. u Calculate MC the same way. u Do not have the same MR at a given price. o In perfect competition: MR = P o In monopoly: MR < P Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 24
The Monopolist’s Benefit from Selling an Additional Unit MB MC • If P = $6, then TR = $6 x 2 = $12 • If P = $5, then TR = $5 x 3 = $15 • The MR of selling the 3 rd unit = $3 (15 -12) • For the 3 rd unit, MR = $3 < P = $5 Price ($/unit) 8 6 5 D 2 3 8 Quantity (units/week) Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 25
Marginal Revenue in Graphical Form MB MC n P Q TR 6 2 12 5 3 15 4 4 16 3 5 15 Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. MR Observations l l 3 1 -1 l MR < P MR declines as quantity increases MR < P because price must be lowered to sell an additional unit Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 26
The Marginal Revenue Curve for a Monopolist with a Straight-Line Demand Curve MB MC Price a a/2 D MR Q 0/2 Q 0 Quantity Observations • The vertical intercept, a, is the same for MR and D • The horizontal intercept for MR, Q 0/2, is one half the demand intercept, Q 0. Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 27
MB MC n Profit Maximization for the Monopolist Profit Maximizing Decision Rule When MR > MC, output should be increased. l When MR < MC, output should be reduced. l Profits are maximized at the level of output for which MR = MC. l Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 28
The Monopolist’s Profit. Maximizing Output Level MB MC Marginal Cost Price ($/unit of output) 6 Observations • If P = $3 & Q = 12 MR < MC and output should be reduced • Profits are maximized at 8 units where MR = MC • P = $4 where quantity demanded = quantity supplied 4 3 2 MR 8 12 D 24 Quantity (units/week) Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 29
The Demand Marginal Cost Curves for a Monopolist MB MC Why the Invisible Hand Breaks Down Under Monopoly Price ($/unit of output) 6 Marginal cost The socially optimal amount occurs where MC = D(MB) @ 12 units 3 D 12 24 Quantity (units/week) Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 30
The Demand Marginal Cost Curves for a Monopolist MB MC Why the Invisible Hand Breaks Down Under Monopoly Price ($/unit of output) 6 Marginal cost • The profit maximizing level of output of 8 units, where MR = MC, is less than the socially optimal output of 12 • Between 8 and 12, MB to society > MC to society • Cannot increase output because MR to the firms is less than MC 4 3 2 MR 8 12 D 24 Quantity (units/week) Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 31
The Demand Marginal Cost Curves for a Monopolist MB MC Why the Invisible Hand Breaks Down Under Monopoly Price ($/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)(4 units/wk) = $4/wk. 4 3 2 MR 8 12 D 24 Quantity (units/week) Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 32
MB MC Even a Monopolist May Suffer an Economic Loss Being a monopolist doesn’t guarantee an economic profit 0. 12 0. 10 ATC MC 0. 05 Economic profit = $400, 000/day Price ($/minute) Economic loss = $400, 000/day 0. 10 0. 08 ATC MC 0. 05 D 20 MR Minutes (millions/day) Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition D 20 24 MR Minutes (millions/day) Slide 33
MB MC n Why the Invisible Hand Breaks Down Under Monopoly l l n Profits are maximized where MR = MC. P > MR P > MC Deadweight loss Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Perfect Competition l l Profits are maximized where MR = MC. P = MR P = MC No deadweight loss Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 34
MB MC n Why the Invisible Hand Breaks Down Under Monopoly Difficulties in Reducing the Deadweight Loss of Monopolies Enforcing antitrust laws l Patents, copyrights, and innovation l Natural monopolies l Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 35
MB MC n Using Discounts to Expand the Market Price Discrimination l The practice of charging different buyers different prices for essentially the same good or service Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 36
MB MC n Using Discounts to Expand the Market Examples of Price Discrimination Senior citizens and student discounts on movie tickets l Supersaver discounts on air travel l Rebate coupons l Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 37
MB MC n Using Discounts to Expand the Market Economic Naturalist l Why do many movie theaters offer discount tickets to students? Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 38
MB MC n Using Discounts to Expand the Market Example l How many manuscripts should Carla edit? Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 39
Total and Marginal Revenue from Editing MB MC Student Reservation Price ($ per paper) Total Revenue ($ per week) A 40 40 (40 x 1) B 38 76 (38 x 2)C 40 36 108 (36 x 3) D 34 160 Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. 32 F 30 180 G H 136 E 26 28196 208 Chapter 10: Monopoly and Other Forms of Imperfect Competition Marginal revenue ($ per paper) 36 32 28 24 20 16 12 Slide 40
MB MC n Using Discounts to Expand the Market Example l How many manuscripts should Carla edit? u Opportunity cost = $29 u If MR > MC: increase output, then stop when MR=MC, 3 units in this case Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 41
MB MC n Using Discounts to Expand the Market Example l How many manuscripts should Carla edit? u Carla o o Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. edits 3 papers TC = 3 x $29 = $87 TR = $108 Economic profit = $108 - $87 = $21/wk Accounting profit = $108 (there are no explicit costs in the example) Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 42
MB MC n Using Discounts to Expand the Market Example l How many manuscripts should Carla edit? u Opportunity cost = $29 u Must charge the same price u Reservation price > opportunity cost for student A to F u Socially efficient number is 6 o o Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. TR = 6 x $30 = $180 TC = 6 x $29 = $174 Economic profit = $180 - $174 = $6 Accounting profit = $180 Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 43
MB MC n Using Discounts to Expand the Market Example l If Carla can price discriminate, how many papers should she edit? u Assume Carla can charge each student the reservation price. Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 44
MB MC Using Discounts to Expand the Market Reservation Student price Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. A 40 B 38 C 36 D 34 E 32 F 30 G 28 H 26 • Carla 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 compared to perfect competition Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 45
MB MC n Using Discounts to Expand the Market Perfectly Discriminating Monopolist l Charging each buyer exactly their reservation price u Economic surplus is maximized u Consumer surplus is zero u Economic surplus = producer surplus Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 46
MB MC n Using Discounts to Expand the Market Limitations to Perfect Price Discrimination Seller will not know each buyer’s reservation price. l Low price buyers could resell to other buyers at a higher price. l Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 47
MB MC n Using Discounts to Expand the Market The Hurdle Method of Price Discrimination l Profit-maximizing seller’s goal is to charge each buyer his/her reservation price. Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 48
MB MC n Using Discounts to Expand the Market The Hurdle Method of Price Discrimination l There are two problems to implementing this pricing strategy. u Seller does not know the reservation prices u Seller must separate high and low price buyers l The hurdle method of price discrimination is used to solve these problems. Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 49
MB MC n Using Discounts to Expand the Market The Hurdle Method of Price Discrimination The practice of offering a discount to all buyers who overcome some obstacle. l Example l u Offering Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. a rebate to those who mail in a coupon Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 50
MB MC n A Perfect Hurdle l n Using Discounts to Expand the Market Separates buyers precisely according to their reservation prices What do you think? l Is a perfect hurdle possible? Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 51
MB MC n Using Discounts to Expand the Market Question l How much should Carla charge for editing if she uses a perfect hurdle? Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 52
MB MC n Using Discounts to Expand the Market Assume Carla offers a mail in rebate coupon l Students with at least a $36 reservation price never use the coupon l Students with a reservation price below $36 use the coupon l Opportunity cost = $29 l Discount coupon = $4 l Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 53
Price Discrimination with a Perfect Hurdle MB MC Student Reservation Price ($ per paper) Total Revenue ($ per week) Marginal revenue ($ per paper) List Price Submarket A 40 40 B 38 76 C 40 36 32 108 D Discount Price Submarket 34 64 Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. 34 E F 30 G H 36 26 28112 130 Chapter 10: Monopoly and Other Forms of Imperfect Competition 32 90 34 30 26 22 18 Slide 54
MB MC n Using Discounts to Expand the Market Solution TR = (3)(36) + (2)(32) = $172 l MC = ($5)($29) = $145 l Economic Profit = $27/wk l Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 55
MB MC n Using Discounts to Expand the Market Question l Is price discrimination a bad thing? u The Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. hurdle method raised economic surplus. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 56
Using Discounts to Expand the Market MB MC Calculating Economic Surplus Consumer Surplus Both Single price & discount Reservation Price A B C Actual Price $40 $38 $36 $36 $4 $2 $0 $6 Without Discount D $34 $32 $2 $8 With Discount n Consumer Surplus Producer Surplus l l Single price = 3(36 - 29) = $21/wk Discount price = 2(32 - 29) = $6/wk $27/wk Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 57
Using Discounts to Expand the Market MB MC Calculating Economic Surplus Consumer Surplus Both Single price & discount Reservation Price A B C Actual Price $40 $38 $36 $36 $4 $2 $0 $6 Without Discount D $34 $22 $2 $8 With Discount n Consumer Surplus Economic Surplus l l Single price = $6 + $21 = $27/wk Discount price = $8 + $27 = $35/wk Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 58
MB MC n Using Discounts to Expand the Market Question l Is Carla’s discount rebate completely efficient? Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 59
MB MC n Using Discounts to Expand the Market Examples of Price Discrimination Temporary Sales l Book publishers and paperback books l Automobile producers offer various models l Commercial air carriers l Movie producers l Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 60
MB MC n Using Discounts to Expand the Market Economic Naturalist l Why might an appliance retailer instruct its clerks to hammer dents into the sides of its stoves and refrigerators? Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 61
MB MC n Using Discounts to Expand the Market Summary Single price monopolies are inefficient because P > MR. l The hurdle method of price discrimination reduces the inefficiency. l Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 62
MB MC n Using Discounts to Expand the Market Summary The more finely the seller can discriminate, the smaller the efficiency loss. l Hurdles are not perfect, therefore, there will be some efficiency loss. l Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 63
MB MC n Public Policy Toward Natural Monopoly Methods of Controlling Natural Monopolies l State ownership and management u Weighing the benefit of marginal cost pricing versus the cost of less incentive for innovation Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 64
MB MC n Public Policy Toward Natural Monopoly Methods of Controlling Natural Monopolies l State regulation of private monopolies u Cost-plus regulation o High administrative cost o Less incentive for innovation o P does not equate to MC Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 65
MB MC n Public Policy Toward Natural Monopoly Methods of Controlling Natural Monopolies l Exclusive contracting for natural monopoly u Competition for the contract sets P = MC u Difficulty when fixed costs are high such as electric utilities Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 66
MB MC n Public Policy Toward Natural Monopoly Methods of Controlling Natural Monopolies l Vigorous enforcement of anti-trust laws u Helps prevent cartels u May prevent economies of scale Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 67
MB MC n Public Policy Toward Natural Monopoly What do you think? l Should we regulate natural monopolies? Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 10: Monopoly and Other Forms of Imperfect Competition Slide 68
End of Chapter MB MC
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