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Chapter 4

Chapter 4 . Monopoly and Antitrust. Measuring the Cost of Monopoly. We know monopolists Charge more (p m >p c ) Produce less ( Q m <Q c ) Higher prices Hurt consumers Help producers Cannot say economy is worse off. $. MC. D. P m. P c. Q. Q m. Q c. MR.

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Chapter 4

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  1. Chapter 4 Monopoly and Antitrust

  2. Measuring the Cost of Monopoly • We know monopolists • Charge more (pm>pc) • Produce less (Qm<Qc) • Higher prices • Hurt consumers • Help producers • Cannot say economy is worse off $ MC D Pm Pc Q Qm Qc MR

  3. Justification for some monopoly power in sports • Some collusion is necessary for schedules and rules • Natural Monopoly • High start-up (fixed) costs • Low marginal costs • Teams claim they use profits to invest in R&D • Find better players (research) • Provide players with training (development) • Teams claim that monopoly power protects cities • Leagues can block teams from moving • Provides stability for fans

  4. Soccer and Monopoly Power • British Premier Soccer League is an open league • North American leagues are closed Monopoly: Protect teams’ territorial rights • Open leagues limit one team’s monopoly power (what does that mean?) • They cannot limit the number of teams in a city • Any team can form in a low league and work its way up • In 2008-09, 5 Premier League teams were in London • Would never have that many in a closed league

  5. Are the Detroit Lions really a monopoly? • Monopoly means no substitutes • Other football teams exist on TV or at local colleges • Other sports exist in Detroit • Other forms of entertainment exist • SO…How do the Lions preserve monopoly power?

  6. Unnatural Monopoly and Barriers to Entry • TV has become a key barrier to entry • Can save a weak league: • ABC/NBC saved the AFL in 1960s • Can also kill a league • WFL, USFL, & ABL foundered w/o network commitment • XFL killed by bad ratings • Leagues also block entry

  7. Anti-trust andThe Sherman Act • The Sherman Act is the basis of anti-trust • It has two basic clauses • (1) Every contract, combination in the form of a trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states, or with foreign nations is hereby declared to be illegal. • (2) Every person who shall monopolize or attempt to monopolize any part of the trade or conspire with any other person or persons to monopolize any part of the trade or commerce among the several states or with foreign nations, shall be deemed guilty of a misdemeanor…

  8. Explaining The Clauses • Clause #1 prohibits collective actions • Firms should compete – not collude • Cannot form cartels (“trusts”) to act like monopoly • Clause #2 attacks individual actions • Anticompetitive behavior • Does not matter how monopoly formed

  9. Baseball’s Antitrust Exemption • The only US industry with a blanket exemption • MLB is not regulated like natural monopolies • Its power has no time limit as with patents • MLB’s exemption comes from a lawsuit by the Federal League • Tried to form 3rd major league in 1914-15 • Charged that MLB violated both parts of Sherman Act

  10. The Supreme Court Ruling, 1922 • Bizarre ruling • Called baseball “a public exhibition, not commerce and that the interstate travel” which would have made baseball subject to federal legislation, was purely incidental to staging these exhibition. • Later decisions denied other leagues an exemption, somehow claiming other sports were commerce while baseball was not.

  11. Impact of Baseball’s Exemption • MLB has had few challengers • Federal League was its last major rival • Other leagues have had regular challenges • Baseball has been relatively stable • Other leagues have seen much more franchise movement • Move by Expos in 2005 was the first since 1972

  12. Contrast with NFL • Court denied the NFL’s claim to an exemption in the 1957 Radovich decision • NFL had no legal monopoly power • NFL had no legal monopsony power • The NFL tried to retain monopsony informally • “Gentleman’s Agreement” until early 1960s • “Rozelle Rule” imposed when that broke down • Forced teams to compensate others for signing away players • Successfully challenged in court by John Mackey in 1976 when a district court found the Rozelle Rule violated the Sherman Act. • NFLPA and NFL settled out of court to a fixed formula on the cost of signing another team’s player, so players still restricted.

  13. With Monopoly Power:Methods to Maximize Profits • 1. First degree price discrimination • MR=P, so can produce to where D=MC • 2. PSL • 3. Variable Ticket Pricing • 4. Third Degree Price Discrimination (next slide)

  14. Third Degree Price Discrimination • To see: put students on the left side; rich alumni on the right. • Students have lower demand than alumni • But MC is the same • QS < QA and PS < PA $ PA DA PS MC Q Q QS QA DA MRS MRA

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