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Ch. 15 Public Policy Toward Monopoly

Ch. 15 Public Policy Toward Monopoly . The Monopoly’s Profit: A Social Cost?. Produce less Q than socially effic . P> MC NOT PROFITS. 4 Govt. Responses to Monopoly. Create more competition Anti-Trust Laws

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Ch. 15 Public Policy Toward Monopoly

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  1. Ch. 15 Public Policy Toward Monopoly The Monopoly’s Profit: A Social Cost? • Produce less Q than socially effic. • P> MC • NOT PROFITS

  2. 4 Govt. Responses to Monopoly • Create more competition • Anti-Trust Laws • Collection of statutes gives govt. power to control markets and promote competition. • Sherman Anti-Trust Act – does 4 things…? • Reduce market power of large trusts • Prevent mergers (Microsoft/Intuit) • Break up large co’s (AT+T) • Prevent large co’s from coordinating with each other (Collusion) **To Regulate or Not?**Allow Mergers or Not?** - -not always clear

  3. ii. Clayton Act ….it does what? • Strengthen Sherman and allow for private law suits • Synergies – • mergers of efficiency -Company A has an excellent product but lousy distribution whereas Company B has a great distribution system but poor products, the companies could create synergy with a merger.

  4. Regulation ( electric, water, phone ) • MC Pricing • …but what about losses? • Remember….if MC < ATC ; ATC is falling • …so a natural monopoly has constantly falling ATC…so MC is always below Profit Max. Natural Monopoly

  5. MC Pricing in this case leads to ….? • economic losses. • To prevent exit, the govt. must…..? • Give subsidy • How large? …. • The size of the losses Additional Problem……no incentive for firm to reduce costs……b/c no matter how low costs are, P would still be set below

  6. 3. Public Ownership (Govt. run) (State run) • Ex’s • Post office • Water/electric in Europe b. Economists prefer private ownership • Too much room for corruption and inefficiency- why don’t they care about inefficiency? … • If poorly run- the only loser is the consumer • Private owners care about efficiency or they go out of business

  7. 4. Do Nothing …why? a. Sometimes the cost to regulate > benefit to consumers and society

  8. PRICE DISCRIMINATION 1. Define…… • Sell same good to different customers at different prices • 3 Lessons • Rational strategy…why? - Increase profit ii. Must have ……? • Market power • Ability to separate customers - how? - can be prevented by arbitrage (define-) iii. Can raise economic welfare - move closer to socially efficient levels

  9. 2. Perfect Price Discrimination -charge each customer exactly what they are willing to pay -impossible; just an extreme view of the concept • Produce socially efficient • Maximize total surplus ; all in form of profit • consumer surplus = … • zero Figure 15-10

  10. Examples Movie tix Airlines Coupons Financial Aid Quantity Discounts -Buy 1 for $1 or 6 for $5

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