What is Wrong with Monopoly Anyway? A competitive firm increases production as long as price is above marginal cost, So in equilibrium P=MC Which means that anyone who values the good above the cost of producing it gets it A monopoly selling all units at the same price Can increase its sales only by lowering its price So stops when price is above MC Which means that some who value the good at more than its cost of production don't get it ·Which is inefficient Price discrimination can reduce this problem and increase profit Charge a high price to those willing to pay it,a low price to those not Ideally selling to everyone willing to pay anything more than MC Perfect price discrimination entirely eliminates this inefficiency But perfect price discrimination creates a new inefficiency A firm spending money to make sure that it is the one that ends up with the monopoly For instance by entering the market early,losing money for a while
What is Wrong with Monopoly Anyway? • A competitive firm increases production as long as price is above marginal cost, • So in equilibrium P=MC • Which means that anyone who values the good above the cost of producing it gets it • A monopoly selling all units at the same price • Can increase its sales only by lowering its price • So stops when price is above MC • Which means that some who value the good at more than its cost of production don’t get it • Which is inefficient • Price discrimination can reduce this problem and increase profit • Charge a high price to those willing to pay it, a low price to those not • Ideally selling to everyone willing to pay anything more than MC • Perfect price discrimination entirely eliminates this inefficiency • But perfect price discrimination creates a new inefficiency • A firm spending money to make sure that it is the one that ends up with the monopoly • For instance by entering the market early, losing money for a while
Why is Monopoly? Natural Monopoly exists if Economies of scale continue up to the full size of the market,so that One big firm can produce at lower cost than several smaller ones But large firms face diseconomies of scale-too many layers between factory floor and boss So natural monopoly is more common in small markets Artificial monopoly.The idea is that a large firm not a natural monopoly Drives all competitors out by selling at a loss,since it has deeper pockets But it is also losing money faster,since it is bigger What about merger to monopoly where there is almost a natural monopoly? Make monopoly profits for a while Until the high price pulls in a new entry ·Government monopoly The Post Office is a monopoly because it is illegal to compete in first class mail Airlines under regulation or licensed professions have entry restricted by law And may,as in the airline case,have price cutting restricted by law
Why is Monopoly? • Natural Monopoly exists if • Economies of scale continue up to the full size of the market, so that • One big firm can produce at lower cost than several smaller ones • But large firms face diseconomies of scale—too many layers between factory floor and boss • So natural monopoly is more common in small markets • Artificial monopoly. The idea is that a large firm not a natural monopoly • Drives all competitors out by selling at a loss, since it has deeper pockets • But it is also losing money faster, since it is bigger • What about merger to monopoly where there is almost a natural monopoly? • Make monopoly profits for a while • Until the high price pulls in a new entry • Government monopoly • The Post Office is a monopoly because it is illegal to compete in first class mail • Airlines under regulation or licensed professions have entry restricted by law • And may, as in the airline case, have price cutting restricted by law
Possible Solutions ·Natural monopoly Break it up-but that raises costs,creates an unstable situation ·Regulate it? If it is forced to sell at MC it goes broke,since it presumably has fixed costs as well So either sell at MC and have a government subsidy Or try to make it sell at average cost This runs into the obvious regulatory problems ·Artificial monopoly Not a problem if it doesn't exist Various laws try to prevent selling below cost But that also hurts a new firm trying to break into the market Prevent mergers that will create a firm with very large market share State monopoly:The simple solution is not to have it
Possible Solutions • Natural monopoly • Break it up—but that raises costs, creates an unstable situation • Regulate it? • If it is forced to sell at MC it goes broke, since it presumably has fixed costs as well • So either sell at MC and have a government subsidy • Or try to make it sell at average cost • This runs into the obvious regulatory problems • Artificial monopoly • Not a problem if it doesn’t exist • Various laws try to prevent selling below cost • But that also hurts a new firm trying to break into the market • Prevent mergers that will create a firm with very large market share • State monopoly: The simple solution is not to have it
Cartels A market with room for only a few firms If they can get together,reduce output,raise price,profits go up At the higher price,each firm has an incentive to cheat on the agreement Enforcing a cartel agreement by contract is not permitted under current U.S.law But it can be enforced by a regulator who wants to support the cartel Either by controlling prices,as in the case of the Civil Aeronautics Board Or by controlling entry Regulation of trucking and health care required a permit to run a route,build in an area Professional licensing controls the number of doctors,hair braiders
Cartels • A market with room for only a few firms • If they can get together, reduce output, raise price, profits go up • At the higher price, each firm has an incentive to cheat on the agreement • Enforcing a cartel agreement by contract is not permitted under current U.S. law • But it can be enforced by a regulator who wants to support the cartel • Either by controlling prices, as in the case of the Civil Aeronautics Board • Or by controlling entry • Regulation of trucking and health care required a permit to run a route, build in an area • Professional licensing controls the number of doctors, hair braiders, …
Extending the Monopoly:Four steps The argument:Use a monopoly in one market to get a monopoly in another The rebuttal:Doing that gets you no additional profit The more the punch cards cost the less people will pay for the computer The steel monopolist can push up the prices of autos without running auto companies Similarly for the wholesale monopolist:Let the retailers compete down their margins The puzzle:Then why do tie-in sales,vertical monopoly and RPM happen? ·Possible answers Tie in sales might be a way of price discriminating against heavy users Vertical integration from steel to autos (which didn't happen,but...) Could reduce the inefficiency due to charging auto companies a high price for steel And so giving them an incentive to substitute fiberglass or aluminum Holding up the retail price gets retailers to compete on non price dimensions Such as costly showrooms Which their competitors could free ride on
Extending the Monopoly: Four steps • The argument: Use a monopoly in one market to get a monopoly in another • The rebuttal: Doing that gets you no additional profit • The more the punch cards cost the less people will pay for the computer • The steel monopolist can push up the prices of autos without running auto companies • Similarly for the wholesale monopolist: Let the retailers compete down their margins • The puzzle: Then why do tie-in sales, vertical monopoly and RPM happen? • Possible answers • Tie in sales might be a way of price discriminating against heavy users • Vertical integration from steel to autos (which didn’t happen, but …) • Could reduce the inefficiency due to charging auto companies a high price for steel • And so giving them an incentive to substitute fiberglass or aluminum • Holding up the retail price gets retailers to compete on non price dimensions • Such as costly showrooms • Which their competitors could free ride on
One more puzzle Why isn't use of the showroom or equivalent sold separately? ·A new business model Set up a minivan test agency Buy one each of the available brands Charge customers by the hour to test drive,consult your experts,read your literature Point them at whatever sellers provide the lowest prices Why doesn't that model exist?
One More Puzzle • Why isn’t use of the showroom or equivalent sold separately? • A new business model • Set up a minivan test agency • Buy one each of the available brands • Charge customers by the hour to test drive, consult your experts, read your literature • Point them at whatever sellers provide the lowest prices • Why doesn’t that model exist?
Monopoly in Silicon Valley Software has unlimited scale economy It is argued that it also has network externalities If everyone else is using Word,that makes it convenient for me to use Word This is the Qwerty/Dvorak story "The Fable of the Keys"argues that this story is entirely mythical The authors have also argued that the observed pattern in software Is serial competition.One program dominates for a while Then a new competitor starts getting better reviews And everyone switches(Liebowitz and Margolis)
Monopoly in Silicon Valley • Software has unlimited scale economy • It is argued that it also has network externalities • If everyone else is using Word, that makes it convenient for me to use Word • This is the Qwerty/Dvorak story • “The Fable of the Keys” argues that this story is entirely mythical • The authors have also argued that the observed pattern in software • Is serial competition. One program dominates for a while • Then a new competitor starts getting better reviews • And everyone switches (Liebowitz and Margolis)
Path Dependence The Qwerty/Dvorak story is one version of path dependence Even if that example is bogus,others might not be Either because of network externalities.Consider languages Or because of the accumulation of small improvements For another version,consider the great man version of history If Julius Caesar,or Napoleon,or Mohammed,or Newton hadn't lived The world thereafter would have been very different ·Or perhaps not Or the idea of decisive battles If Harald Hardraada had not invaded just before William the Conqueror Harold might have won Hastings,England never been conquered Or won Hastings and then lost against Harald,England conquered by Norway Did one bullet at Chancellorsville change the outcome of the Civil War?
Path Dependence • The Qwerty/Dvorak story is one version of path dependence • Even if that example is bogus, others might not be • Either because of network externalities. Consider languages • Or because of the accumulation of small improvements • For another version, consider the great man version of history • If Julius Caesar, or Napoleon, or Mohammed, or Newton hadn’t lived • The world thereafter would have been very different • Or perhaps not • Or the idea of decisive battles • If Harald Hardraada had not invaded just before William the Conqueror • Harold might have won Hastings, England never been conquered • Or won Hastings and then lost against Harald, England conquered by Norway • Did one bullet at Chancellorsville change the outcome of the Civil War?
Legal Systems Very Different 。The Idea All societies face about the same problems They solve them in an interesting variety of different ways And they are all grownups So try to make sense of how each legal system worked 。Some of the systems Imperial China:2000 years Periclean Athens:The Legal System of a Mad Economist Saga Period Iceland:Kill someone,his relatives sue you Islamic Law:Separation of law and state Jewish law:When God is the legislator,what if He gets it wrong? 18th Century England:Our legal system without police or public prosecutors Romani:The rest of the human race as environment,not people Amish:Anarchists.Very rule centered anarchists. Pirate ships as democracies In defense of prison gangs
Legal Systems Very Different • The Idea • All societies face about the same problems • They solve them in an interesting variety of different ways • And they are all grownups • So try to make sense of how each legal system worked • Some of the systems • Imperial China: 2000 years • Periclean Athens: The Legal System of a Mad Economist • Saga Period Iceland: Kill someone, his relatives sue you • Islamic Law: Separation of law and state • Jewish law: When God is the legislator, what if He gets it wrong? • 18th Century England: Our legal system without police or public prosecutors • Romani: The rest of the human race as environment, not people • Amish: Anarchists. Very rule centered anarchists. • Pirate ships as democracies • In defense of prison gangs
Imperial China:I As viewed from above,a pure criminal legal system There is no way to sue someone for not paying what he owes you All you can do is report him as a swindler to the district magistrate The case is out of your hands.The magistrate can ignore the case,he can Have him punished for the crime of swindling ·Make him pay you As viewed from below,tort law masquerading as criminal law In addition to important stuff,there are minor matters Loans,land,marriage,and inheritance. I charge you with not paying back the loan The magistrate schedules a court date,comments on the case I then bargain with you,you pay back the loan We humbly ask the magistrate to cancel the court date The magistrate,being a busy man,agrees If we don't reach agreement,the trial is held,the magistrate tells you to pay If you do,he generously cancels the punishment for your offense
Imperial China: I • As viewed from above, a pure criminal legal system • There is no way to sue someone for not paying what he owes you • All you can do is report him as a swindler to the district magistrate • The case is out of your hands. The magistrate can ignore the case, he can • Have him punished for the crime of swindling • Make him pay you • As viewed from below, tort law masquerading as criminal law • In addition to important stuff, there are minor matters • Loans, land, marriage, and inheritance. • I charge you with not paying back the loan • The magistrate schedules a court date, comments on the case • I then bargain with you, you pay back the loan • We humbly ask the magistrate to cancel the court date • The magistrate, being a busy man, agrees • If we don’t reach agreement, the trial is held, the magistrate tells you to pay • If you do, he generously cancels the punishment for your offense