Monopoly

Scale of justice 2.svg
Competition law
Basic concepts
  • History of competition law
  • Monopoly
    • Coercive monopoly
    • Natural monopoly
  • Barriers to entry
  • Market power
  • SSNIP test
  • Relevant market
  • Merger control
Anti-competitive practices
  • Monopolization
  • Collusion
    • Formation of cartels
    • Price fixing
    • Bid rigging
  • Product bundling and tying
  • Refusal to deal
    • Group boycott
    • Essential facilities
  • Exclusive dealing
  • Dividing territories
  • Conscious parallelism
  • Predatory pricing
  • Misuse of patents and copyrights
Enforcement authorities and organizations
  • International Competition Network
  • List of competition regulators

In economics, a monopoly (from Greek monos / μονος (alone or single) + polein / πωλειν (to sell)) exists when a specific individual or an enterprise has sufficient control over a particular product or service to determine significantly the terms on which other individuals shall have access to it. (This is in contrast to a monopsony which relates to a single entity's control over a market to purchase a good or service. And contrasted with oligopoly where a few entities exert considerable influence over an industry)[1] Monopolies are thus characterised by a lack of economic competition for the good or service that they provide and a lack of viable substitute goods.[2] The verb "monopolise" refers to the process by which a firm gains persistently greater market share than what is expected under perfect competition.

A monopoly must be distinguished from monopsony, in which there is only one buyer of a product or service ; a monopoly may also have monopsony control of a sector of a market. Likewise, a monopoly should be distinguished from a cartel (a form of oligopoly), in which several providers act together to coordinate services, prices or sale of goods. Monopolies, monopsonies and oligopolies are all situations where one or a few entities have market power and therefore must interact with their customers (monopoly), suppliers (monopsony) and the other firms (oligopoly) in a game theoretic manner - meaning that expectations about their behavior affects other players' choice of strategy and vice versa. This is to be contrasted with the model of perfect competition where firms are price takers and do not have market power. Monopolists typically produce fewer goods and sell them at a higher price than under perfect competition, resulting in abnormal and sustained profit. (See also Bertrand, Cournot or Steckelberg equilibria, market power, market share, market concentration, Monopoly profit, industrial economics).

Monopolies can form naturally or through vertical or horizontal mergers. A monopoly is said to be coercive when the monopoly firm actively prohibits competitors from entering the field or punishes competitors who do (see Chainstore paradox).

In many jurisdictions, competition laws place specific restrictions on monopolies. Holding a dominant position or a monopoly in the market is not illegal in itself, however certain categories of behavior can, when a business is dominant, be considered abusive and therefore be met with legal sanctions. A government-granted monopoly or legal monopoly, by contrast, is sanctioned by the state, often to provide an incentive to invest in a risky venture or enrich a domestic interest group. Patents, copyright, and trademarks are all examples of government granted and enforced monopolies. The government may also reserve the venture for itself, thus forming a government monopoly.

Contents

Market structures

In economics, monopoly is a pivotal area to the study of market structures, which directly concerns normative aspects of economic competition, and sets the foundations for fields such as industrial organization and economics of regulation. There are four basic types of market structures under traditional economic analysis: perfect competition, monopolistic competition, oligopoly and monopoly. A monopoly is a market structure in which a single supplier produces and sells the product. If there is a single seller in a certain industry and there are no close substitutes for the goods being produced, then the market structure is that of a "pure monopoly". Sometimes, there are many sellers in an industry and/or there exist many close substitutes for the goods being produced, but nevertheless firms retain some market power. This is called monopolistic competition, whereas in oligopoly the main theoretical framework revolves around firm's strategic interactions.

In general, the main results from this theory compare price-fixing methods across market structures, analyse the impact of a certain structure on welfare, and play with different variations of technological/demand assumptions in order to assess its consequences on the abstract model of society. Most economic textbooks follow the practice of carefully explaining the perfect competition model, only because of its usefulness to understand "departures" from it (the so called imperfect competition models).

The boundaries of what constitutes a market and what doesn't, is a relevant distinction to make in economic analysis. In a general equilibrium context, a good is a specific concept entangling geographical and time-related characteristics (grapes sold in October 2009 in Moscow is a different good from grapes sold in October 2009 in New York). Most studies of market structure relax a little their definition of a good, allowing for more flexibility at the identification of substitute-goods. Therefore, one can find an economic analysis of the market of grapes in Russia, for example, which is not a market in the strict sense of general equilibrium theory.

Characteristics

Sources of monopoly power

Monopolies derive their market power from barriers to entry - circumstances that prevent or greatly impede a potential competitor's entry into the market or ability to compete in the market. There are three major types of barriers to entry; economic, legal and deliberate.[6]

  • Economic barriers: Economic barriers include economies of scale, capital requirements, cost advantages and technological superiority.[7]
Economies of scale: Monopolies are characterised by declining costs over a relatively large range of production.[8] Declining costs coupled with large start up costs give monopolies an advantage over would be competitors. Monopolies are often in a position to cut prices below a new entrant's operating costs and drive them out of the industry.[8] Further the size of the industry relative to the minimum efficient scale may limit the number of firms that can effectively compete within the industry. If for example the industry is large enough to support one firm of minimum efficient scale then other firms entering the industry will operate at a size that is less than MES meaning that these firms cannot produce at an average cost that is competitive with the dominant industry. Finally, if long run average cost is constantly falling the least cost way to provide a good or service is through a single firm.[9]
Capital requirements: Production processes that require large investments of capital, or large research and development costs or substantial sunk costs limit the number of firms in an industry.[10] Large fixed costs also make it difficult for a small firm to enter an industry and expand.[11]
Technological superiority: A monopoly may be better able to acquire, integrate and use the best possible technology in producing its goods while entrants do not have the size or fiscal muscle to use the best available technology.[8] In plain English one large firm can sometimes produce goods cheaper than several small firms.[12]
No substitute goods: A monopoly sells a good for which there is no close substitutes. The absence of substitutes makes the demand for the good relatively inelastic enabling monopolies to extract positive profits.
Control of Natural Resources: A prime source of monopoly power is the control of resources that are critical to the production of a final good.
  • Legal barriers: Legal rights can provide opportunity to monopolise the market in a good. Intellectual property rights, including patents and copyrights, give a monopolist exclusive control over the production and selling of certain goods. Property rights may give a firm the exclusive control over the materials necessary to produce a good.
  • Deliberate Actions: A firm wanting to monopolise a market may engage in various types of deliberate action to exclude competitors or eliminate competition. Such actions include collusion, lobbying governmental authorities, and force.

(see anti-competitive practices.)

In addition to barriers to entry and competition, barriers to exit may be a source of market power. Barriers to exit are market conditions that make it difficult or expensive for a firm to leave the market. High liquidation costs are a primary barrier to exit.[13] Market exit and shutdown are separate events. The decision whether to shut down or operate is not affected by exit barriers. A firm will shut down if price falls below minimum average variable costs.

Monopoly versus competitive markets

While monopoly and perfect competition mark the extremes of market structures[14] there are many point of similarity. The cost functions are the same.[15] Both monopolies and perfectly competitive firms minimize cost and maximize profit. The shutdown decisions are the same. Both are assumed to face perfectly competitive factors markets. There are distinctions, some of the more important of which are as follows:

  • Market Power - market power is the ability to control the terms and condition of exchange. Specifically market power is the ability to raise prices without losing all one's customers to competitors. Perfectly competitive (PC) firms have zero market power when it comes to setting prices. All firms in a PC market are price takers. The price is set by the interaction of demand and supply at the market or aggregate level. Individual firms simply take the price determined by the market and produce that quantity of output that maximize the firm's profits. If a PC firm attempted to raise prices above the market level all its "customers" would abandon the firm and purchase at the market price from other firms. A monopoly has considerable although not unlimited market power. A monopoly has the power to set prices or quantities although not both.[16] A monopoly is a price maker.[17] The monopoly is the market[18] and prices are set by the monopolist based on his circumstances and not the interaction of demand and supply. The two primary factors determining monopoly market power are the firm's demand curve and its cost structure.[19]
  • Price - In a perfectly competitive market price equals marginal cost. In a monopolistic market price is greater than marginal cost.[20]
  • Marginal revenue and price - In a perfectly competitive market marginal revenue equals price. In a monopolistic market marrgianl revenue is less than price.[21]
  • Product differentiation: There is zero product differentiation in a perfectly competitive market. Every product is perfectly homogeneous and a perfect substitute. With a monopoly there is high to absolute product differentiation in the sense that there is no available substitute for a monopolized good. The monopolist is the sole supplier of the good in question.[22] A customer either buys from the monopolist on her terms or does without.
  • Number of competitors: PC markets are populated by an infinite number of buyers and sellers. Monopoly involves a single seller.[22]
  • Barriers to Entry - Barriers to entry are factors and circumstances that prevent entry into market by would be competitors and impediments to competition that limit new firms from operating and expanding within the market. PC markets have free entry and exit. There are no barriers to entry, exit or competition. Monopolies have relatively high barriers to entry. The barriers must be strong enough to prevent or discourage any potential competitor from entering the market.
  • Elasticity of Demand; the price elasticity of demand is the percentage change in demand caused by a one percent change in relative price. A successful monopoly would face a relatively inelastic demand curve. A low coefficient of elasticity is indicative of effective barriers to entry. A PC firm faces what it perceives to be perfectly elastic demand curve. The coefficient of elasticity for a perfectly competitive demand curve is infinite.
  • Excess Profits- Excess or positive profits are profit above the normal expected return on investment. A PC firm can make excess profits in the short run but excess profits attract competitors who can freely enter the market and drive down prices eventually reducing excess profits to zero.[23] A monopoly can preserve excess profits because barriers to entry prevent competitors from entering the market.[24]
  • Profit Maximization - A PC firm maximizes profits by producing where price equals marginal costs. A monopoly maximises profits by producing where marginal revenue equals marginal costs.[25] The rules are not equivalent. The demand curve for a PC firm is perfectly elastic - flat. The demand curve is identical to the average revenue curve and the price line. Since the average revenue curve is constant the marginal revenue curve is also constant and equals the demand curve, Average revenue is the same as price (AR = TR/Q = P x Q/Q = P). Thus the price line is also identical to the demand curve. In sum, D = AR = MR = P.
  • P-Max quantity, price and profit - If a monopolist obtains control of a formerly perfectly competitive industry, the monopolist would raise prices, cut production, and realise positive economic profits.[26]
  • Supply Curve - in a perfectly competitive market there is a well defined supply function with a one to one relationship between price and quantity supplied. In a monopolistic market no such supply relationship exists. A monopolist cannot trace out a short run supply curve because for a given price there is not a unique quantity supplied.As Pindyck and Rubenfeld note a change in demand "can lead to changes in prices with no change in output, changes in output with no change in price or both." [27] Monopolies produce where marginal revenue equals marginal costs. For a specific demand curve the supply "curve" would be the price/quantity combination at the point where marginal revene equals marginal cost. If the demand curve shifted the marginal revenue curve would shift as well an a new equilibrium and supply "point" would be established. The locus of these points would not be a supply curve in any conventional sense.[28][29]

The most significant distinction between a PC firm and a monopoly is that the monopoly faces a downward sloping demand curve rather than the "perceived" perfectly elastic curve of the PC firm.[30] Practically all the variations above mentioned relate to this fact. If there is a downward sloping demand curve then by necessity there is a distinct marginal revenue curve. The implications of this fact are best made manifest with a linear demand curve, Assume that the inverse demand curve is of the form x = a - by. Then the total revenue curve is TR = ay - by2 and the marginal revenue curve is thus MR = a - 2by. From this several things are evident. First the marginal revenue curve has the same y intercept as the inverse demand curve. Second the slope of the marginal revenue curve is twice that of the inverse demand curve. Third the x intercept of the marginal revenue curve is half that of the inverse demand curve. What is not quite so evident is that the marginal revenue curve lies below the inverse demand curve at all points.[30] Since all firms maximise profits by equating MR and MC it must be the case that at the profit maximizing quantity MR and MC are less than price which further implies that a monopoly produces less quantity at a higher price than if the market were perfectly competitive.

The fact that a monopoly faces a downward sloping demand curve means that the relationship between total revenue and output for a monopoly is much different than that of competitive firms. [31]Total revenue equals price times quantity. A competitive firm faces a perfectly elastic demand curve meaning that total revenue is proportional to output.[32] Thus the total revenue curve for a competitive firm is a ray with a slope equal to the market price.[33] A competitive firm can sell all the output it desires at the market price. For a monopoly to increase sales it must reduce price. Thus the total revenue curve for a monopoly is a parabola that begins at the origin and reaches a maximum value then continuously falls until total revenue is again zero.[34] Total revenue reaches its maximum value when the slope of the total revenue function is zero. The slope of the total revenue function is marginal revenue. So the revenue maximizing quantity and price occur when MR = 0. For example assume that the monopoly’s demand function is P = 50 - 2Q. The total revenue function would be TR = 50Q - 2Q2 and marginal revenue would be 50 - 4Q. Setting marginal revenue equal to zero we have

50 - 4Q = 0
-4Q = -50
Q = 12.5

So the revenue maximizing quantity for the monopoly is 12.5 units and the revenue maximizing price is 25.

A company with a monopoly does not undergo price pressure from competitors, although it may face pricing pressure from potential competition. If a company raises prices too high, then others may enter the market if they are able to provide the same good, or a substitute, at a lower price.[35] The idea that monopolies in markets with easy entry need not be regulated against is known as the "revolution in monopoly theory".[36]

A monopolist can extract only one premium, and getting into complementary markets does not pay. That is, the total profits a monopolist could earn if it sought to leverage its monopoly in one market by monopolizing a complementary market are equal to the extra profits it could earn anyway by charging more for the monopoly product itself. However, the one monopoly profit theorem does not hold true if customers in the monopoly good are stranded or poorly informed, or if the tied good has high fixed costs.

A pure monopoly follows the same economic rationality of firms under perfect competition, i.e. to optimise a profit function given some constraints. Under the assumptions of increasing marginal costs, exogenous inputs' prices, and control concentrated on a single agent or entrepreneur, the optimal decision is to equate the marginal cost and marginal revenue of production. Nonetheless, a pure monopoly can -unlike a competitive firm- alter the market price for her own convenience: a decrease in the level of production results in a higher price. In the economics' jargon, it is said that pure monopolies "face a downward-sloping demand". An important consequence of such behaviour is worth noticing: typically a monopoly selects a higher price and lower quantity of output than a price-taking firm; again, less is available at a higher price.[37]

Price Discrimination and Capturing of Consumer Surplus

Improved price discrimination allows a monopolist to gain more profit by charging more to those who want or need the product more or who have a higher ability to pay. For example, most economic textbooks cost more in the United States than in "Third world countries" like Ethiopia. In this case, the publisher is using their government granted copyright monopoly to price discriminate between (presumed) wealthier economics students and (presumed) poor economics students. Similarly, most patented medications cost more in the U.S. than in other countries with a (presumed) poorer customer base. Perfect price discrimination would allow the monopolist to charge a unique price to each customer based on their individual demand. This would allow the monopolist to extract all the consumer surplus of the market. Note that while such perfect price discrimination is still a theoretical construct, it is becoming increasingly real with the advances in information technology, data mining, and micromarketing. Typically, a high general price is listed, and various market segments get varying discounts. This is an example of framing to make the process of charging some people higher prices more socially acceptable. (see also behavioral economics, decision biases).

It is important to realize that partial price discrimination can cause some customers who are inappropriately pooled with high price customers to be excluded from the market. For example, a poor student in the U.S. might be excluded from purchasing an economics textbook at the U.S. price, that she might have purchased at the China price. Similarly, a wealthy student in China might have been willing to pay more (although naturally it is against their interests to signal this to the monopolist). These are deadweight losses and decrease a monopolist's profits. As such, monopolists have substantial economic interest in improving their market information, and market segmenting.

There are important points for one to remember when considering the monopoly model diagram (and its associated conclusions) displayed here. The result that monopoly prices are higher, and production output lower, than a competitive firm follow from a requirement that the monopoly not charge different prices for different customers. That is, the monopoly is restricted from engaging in price discrimination (this is called first degree price discrimination, where all customers are charged the same amount). If the monopoly were permitted to charge individualised prices (this is called third degree price discrimination), the quantity produced, and the price charged to the marginal customer, would be identical to a competitive firm, thus eliminating the deadweight loss; however, all gains from trade (social welfare) would accrue to the monopolist and none to the consumer. In essence, every consumer would be just indifferent between (1) going completely without the product or service and (2) being able to purchase it from the monopolist.

As long as the price elasticity of demand for most customers is less than one in absolute value, it is advantageous for a firm to increase its prices: it then receives more money for fewer goods. With a price increase, price elasticity tends to rise, and in the optimum case above it will be greater than one for most customers.

Pricing with Market Power

Price discrimination is charging different consumers different prices for the same product.[38] Absent price discrimination each consumer pays the same market price. The purpose of price discrimination is to capture consumer surplus and transfer it to the producer.[39] Price discrimination is not limited to monopolies. Any firm that has market power can engage in price discrimination. Perfect competition is the only market form in which price discrimination would be impossible. [40]There are three forms of price discrimination. First degree price discrimination charges each consumer the maximum price the consumer is willing to pay. Second degree price discrimination involves quantity discounts. Third degree price discrimination involves grouping consumers according to willingness to pay as measured by their price elasticities of demand and charging each group a different price. Third degree price discrimination is by far the most prevalent form

Purpose of Price Discrimination

The purpose of price discrimination is to capture consumer surplus and transfer it to the seller.[41] A firm maximizes profit by selling where marginal revenue equals marginal cost. A firm that does not engage in price discrimination will charge the profit maximizing price, P*, to all its customers. Under such circumstances there are customers who would be willing to pay a higher price than P* and those who will not pay P* but would buy at a lower price. A price discrimination strategy is to charge first group a higher price and the second a lower price to capture there sells. The basic problem is to identify customers by their willingness to pay and have them pay the price.

Conditions for price discrimination

There are three conditions that must be present for a firm to engage in successful price discrimination. First, the firm must have market power.[42] Second, first must be able to sort customers according to their willingness to pay for the good.[43] Third, the firm must be able to prevent resell.

Market Power

Market power is the firm’s ability to raise prices without losing all its customers. A firm must have some degree of market power to practice price discrimination. Without market power the firm cannot charge more than the market price.[44] Any market structure characterized by a downward sloping demand curve has market power - monopoly, monopolistic competition and oligopoly.[45]The only market structure that has no market power is perfect competition.[46]

Willingness to Pay

Consumers must differ in their demand elasticities and the seller must know something about how demand elasticities vary among consumers. [47][48] Without this information the seller will not know the relative elasticities of various groups of consumers[49] would not be able to separate customers according to their PEDS.[50]

Eliminate the Middleman

A firm wishing to practice price discrimination must be able to prevent middle men or brokers from capturing the consumer surplus for themselves. The firm accomplishes this by preventing or limiting resale. Many methods are used to prevent resale, For example persons are required to show photo identification and a borading pass before boarding a plane. Most travelers assume that this practice is strictly a matter of security. However, a primary purpose in requesting photo id is to confirm that the ticket purchaser is the person about to board the plane and not someone who has repurchased the ticket from a discount buyer.

The inability to prevent resale is the largest obstacle to successful price discrimination. [51]Companies have however developed numerous methods to prevent resale. For example, universities require that student show identification before entering sporting events. Governments may make it illegal to resale tickets or products. In Boston Red Sox tickets can only be resold to the team. Resale to individuals is illegal.

Basic Forms

The three basic forms of price discrimination are first, second and third degree price discrimination. In first degree price discrimination the firms charge the maximum price each customer is willing to pay. The maximum price a consumer is willing to pay for a unit of the good is the reservation price. Thus for each unit the seller tries to set the price equal to the consumer’s reservation price.[52] Direct information about a consumer’s willingness to pay is rarely available. Seller’s tend to rely on secondary information such as where a person lives (zip codes),[53] how she dresses, what kind of car she drives, her occupation, how much money she makes and her spending patterns.[54]. First degree price discrimination most frequently occurs in the area of professional services or in transactions involving direct buyer seller negotiations. For example, am accountants who has prepared a consumer's tax return has information that can used to charge customers based on an estimate of their ability to pay. [55]

In second degree price discrimination or quantity discrimination customers are charged different prices based on how much they buy. There is a single price schedule for all consumers but the prices vary depending on the quantity of the good bought. [56]The theory behind second second degree price discrimination is a consumer is willing to buy only a certain quantity of a good at a given price and then no more. Companies know that consumer’s willingness to buy falls as more units are purchased, The task for the seller is to identify these price points and to reduce the price once one is reached in the hope that a reduced price will trigger additional purchases from the consumer. For example, sell in units blocks rather than individual units.

In third degree price discrimination or multi-market price discrimination [57]the seller divides the consumers into different groups according to their willingness to pay as measured by their price elasticity of demand. Each group of consumers effectively becomes a separate market with its own demand curve and marginal revenue curve.[58].Generally the firm The firm then attempts to maximize profits in each segment by equating MR and MC,[59]charge a higher price to the group with a more price inelastic demand and a relatively lower price to the group with a more elastic demand.[60] Examples of third degree price discrimination abound. Airlines charge higher prices to business travelers than to vacation travelers. The reasoning is that the demand curve for a vacation traveler is relatively elastic while the demand curve for a business traveler is relatively inelastic. Any determinant of price elasticity of demand can be used to segment markets. For example, df Seniors have a more elastic demand for movies than do young adults because they generally have more free time.

Classifying Customers

Successful price discrimination requires that firms separate consumers according to their willingness to buy. Determining a customer's willingness to buy a good is difficult. Asking concumer's directly is fruitless. Consumer's don't know and to the extent they do they are reluctant to share that information with marketers. the two main methods for determining willingness to buy are observation of personal characteristics and consumer actions. As noted information about where a person lives (zip codes), how she dresses, what kind of car she drives, her occupation, how much money she makes and her spending patterns can be helpful in classifying consumers.

Monopoly and efficiency

Surpluses and deadweight loss created by monopoly price setting

According to the standard model, in which a monopolist sets a single price for all consumers, the monopolist will sell a lower quantity of goods at a higher price than would firms under perfect competition. Because the monopolist ultimately forgoes transactions with consumers who value the product or service more than its cost, monopoly pricing creates a deadweight loss referring to potential gains that went neither to the monopolist or to consumers. Given the presence of this deadweight loss, the combined surplus (or wealth) for the monopolist and consumers is necessarily less than the total surplus obtained by consumers under perfect competition. Where efficiency is defined by the total gains from trade, the monopoly setting is less efficient than perfect competition.

It is often argued that monopolies tend to become less efficient and innovative over time, becoming "complacent giants", because they do not have to be efficient or innovative to compete in the marketplace. Sometimes this very loss of psychological efficiency can raise a potential competitor's value enough to overcome market entry barriers, or provide incentive for research and investment into new alternatives. The theory of contestable markets argues that in some circumstances (private) monopolies are forced to behave as if there were competition because of the risk of losing their monopoly to new entrants. This is likely to happen where a market's barriers to entry are low. It might also be because of the availability in the longer term of substitutes in other markets. For example, a canal monopoly, while worth a great deal in the late eighteenth century United Kingdom, was worth much less in the late nineteenth century because of the introduction of railways as a substitute.

Natural monopoly

A natural monopoly is a firm which experiences increasing returns to scale over the relevant range of output.[61] A natural monopoly occurs where the average cost of production "declines throughout the relevant range of product demand." The relevant range of product demand is where the average cost curve is below the demand curve.[62] When this situation occurs it is always cheaper for one large firm to supply the market than multiple smaller firms, in fact, absent government intervention in such markets will naturally evolve into a monopoly. An early market entrant who takes advantage of the cost structure and can expand rapidly can exclude smaller firms from entering and can drive or buy out other firms. A natural monopoly suffers from the same inefficiencies as any other monopoly. Left to its own devices a profit seeking natural monopoly will produce where marginal revenue equals marginal costs. Regulation of natural monopolies is problematic. Breaking up such monopolies is by definition inefficient. The most frequently used methods dealing with natural monopolies is government regulations and public ownership. Government regulation generally consists of regulatory commissions charged with the principal duty of setting prices.[63] To reduce prices and increase output regulators often use average cost pricing. Under average cost pricing the price and quantity are determined by the intersection of the average cost curve and the demand curve.[64] This pricing scheme eliminates any positive economic profits since price equals average cost. Average cost pricing is not perfect. Regulators must estimate average costs. Firms have a reduced incentive to lower costs. And regulation of this type has not been limited to natural monopolies.[64]

Government-granted monopoly

A government-granted monopoly (also called a "de jure monopoly") is a form of coercive monopoly by which a government grants exclusive privilege to a private individual or firm to be the sole provider of a good or service; potential competitors are excluded from the market by law, regulation, or other mechanisms of government enforcement. Copyright, patents and trademarks are examples of government-granted monopolies.

Monopolist Shutdown Rule

A monopolist should shutdown when price is less than average variable cost for every output level.[65] In other words where the demand curve is entirely below the average variable cost curve.[66]Under these circumstances at the profit maximum level of output (MR = MC) average revenue would be lower than average variable costs and the monopolists would be better off shutting down in the short run.[67]

Breaking up monopolies

When monopolies are not broken through the open market, sometimes a government will step in, either to regulate the monopoly, turn it into a publicly owned monopoly environment, or forcibly break it up (see Antitrust law and trust busting). Public utilities, often being naturally efficient with only one operator and therefore less susceptible to efficient breakup, are often strongly regulated or publicly owned. AT&T and Standard Oil are debatable examples of the breakup of a private monopoly: When AT&T, a monopoly previously protected by force of law, was broken up into the "Baby Bell" components in 1984, MCI, Sprint, and other companies were able to compete effectively in the long distance phone market.

Law

Main article: Competition law

The existence of a very high market share does not always mean consumers are paying excessive prices since the threat of new entrants to the market can restrain a high-market-share firm's price increases. Competition law does not make merely having a monopoly illegal, but rather abusing the power a monopoly may confer, for instance through exclusionary practices.

First it is necessary to determine whether a firm is dominant, or whether it behaves "to an appreciable extent independently of its competitors, customers and ultimately of its consumer".[68] As with collusive conduct, market shares are determined with reference to the particular market in which the firm and product in question is sold.

Under EU law, very large market shares raises a presumption that a firm is dominant,[69] which may be rebuttable.[70] If a firm has a dominant position, then there is "a special responsibility not to allow its conduct to impair competition on the common market".[71] The lowest yet market share of a firm considered "dominant" in the EU was 39.7%.[72]

Certain categories of abusive conduct are usually prohibited under the country's legislation, though the lists are seldom closed.[73] The main recognised categories are:

Despite wide agreement that the above constitute abusive practices, there is some debate about whether there needs to be a causal connection between the dominant position of a company and its actual abusive conduct. Furthermore, there has been some consideration of what happens when a firm merely attempts to abuse its dominant position.

Historical monopolies

The term "monopoly" first appears in Aristotle's Politics, wherein Aristotle describes Thales of Miletus' cornering of the market in olive presses as a monopoly (μονοπωλίαν).[74][75]

Common salt (sodium chloride) historically gave rise to natural monopolies. Until recently, a combination of strong sunshine and low humidity or an extension of peat marshes was necessary for winning salt from the sea, the most plentiful source. Changing sea levels periodically caused salt "famines" and communities were forced to depend upon those who controlled the scarce inland mines and salt springs, which were often in hostile areas (the Sahara desert) requiring well-organised security for transport, storage, and distribution. The "Gabelle", a notoriously high tax levied upon salt, played a role in the start of the French Revolution, when strict legal controls were in place over who was allowed to sell and distribute salt.

Robin Gollan argues in The Coalminers of New South Wales that anti-competitive practices developed in the Newcastle coal industry as a result of the business cycle. The monopoly was generated by formal meetings of the local management of coal companies agreeing to fix a minimum price for sale at dock. This collusion was known as "The Vend". The Vend collapsed and was reformed repeatedly throughout the late nineteenth century, cracking under recession in the business cycle. "The Vend" was able to maintain its monopoly due to trade union support, and material advantages (primarily coal geography). In the early twentieth century as a result of comparable monopolistic practices in the Australian coastal shipping business, the vend took on a new form as an informal and illegal collusion between the steamship owners and the coal industry, eventually going to the High Court as Adelaide Steamship Co. Ltd v. R. & AG.[76]

Examples of legal (and or) illegal monopolies

Countering monopolies

According to professor Milton Friedman, laws against monopolies cause more harm than good, but unnecessary monopolies should be countered by removing tariffs and other regulation that upholds monopolies.

A monopoly can seldom be established within a country without overt and covert government assistance in the form of a tariff or some other device. It is close to impossible to do so on a world scale. The De Beers diamond monopoly is the only one we know of that appears to have succeeded. - - In a world of free trade, international cartels would disappear even more quickly.[82]

On the other hand, professor Steve H. Hanke believes that although private monopolies are more efficient than public ones, often by factor two, sometimes private natural monopolies, such as local water distribution, should be regulated (not prohibited) through, e.g., price auctions[83].

See also

Notes and references

  1. ↑ Milton Friedman (2002). "VIII: Monopoly and the Social Responsibility of Business and Labor" (paperback). Capitalism and Freedom (40th anniversary edition ed.). The University of Chicago Press. pp. 208. ISBN 0-226-26421-1. 
  2. ↑ Blinder, Alan S; William J Baumol and Colton L Gale (June 2001). "11: Monopoly" (paperback). Microeconomics: Principles and Policy. Thomson South-Western. pp. 212. ISBN 0-324-22115-0. "A pure monopoly is an industry in which there is only one supplier of a product for which there are no close substitutes and in which is very difficult or impossible for another firm to coexist" 
  3. ↑ Binger, B & Hoffman, E.: Microeconomics with Calculus, 2nd ed. p 391 Addison-Wesley 1998.
  4. ↑ Png, Managerial Economics (Blackwell 1999)
  5. ↑ Krugman & Wells: Microeconomics 2d ed. Worth 2009
  6. ↑ Goodwin, Nelson, Ackerman, & Weissskopf, Microeconomics in Context 2d ed. (Sharpe 2009) at 307&08.
  7. ↑ Samuelson & Marks, Managerial Economics 4th ed. (Wiley 2003) at 365-66.
  8. ↑ 8.0 8.1 8.2 Nicholson & Snyder, Intermediate Microeconomics (Thomson 2007) at 379.
  9. ↑ Frank (2009) 274.
  10. ↑ Samuelson & Marks, Managerial Economics 4th ed. (Wiley 2003) at 365.
  11. ↑ Goodwin, Nelson, Ackerman, & Weissskopf, Microeconomics in Context 2d ed. (Sharpe 2009) at 307.
  12. ↑ Ayers & Collinge, Microeconomics (Pearson 2003) at 238.
  13. ↑ Png, I: Managerial Economics p. 271 Blackwell 1999 ISBN 1-55786-927-8
  14. ↑ Png, I: Managerial Economics p. 268 Blackwell 1999 ISBN 1-55786-927-8
  15. ↑ Negbennebor, A: Microeconomics, The Freedom to Choose CAT 2001
  16. ↑ Hirschey, M, Managerial Economics. p. 412 Dreyden 2000.
  17. ↑ Melvin & Boyes, Microeconomics 5th ed. (Houghton Mifflin 2002) 239
  18. ↑ Pindyck, R & Rubinfeld, D: Microeconomics 5th ed. p.328 Prentice-Hall 2001
  19. ↑ Varian, H.: Microeconomic Analysis 3rd ed. p. 233. Norton 1992.
  20. ↑ Mankiw, (2007) 350.
  21. ↑ Mankiw, (2007) 338.
  22. ↑ 22.0 22.1 Hirschey, M, Managerial Economics. p. 426 Dreyden 2000.
  23. ↑ Pindyck, R & Rubinfeld, D: Microeconomics 5th ed. p. 333 Prentice-Hall 2001.
  24. ↑ Melvin and Boyes (2002) p.245.
  25. ↑ Varian, H: Microeconomic Analysis 3rd ed. p. 235 Norton 1992.
  26. ↑ Pindyck, R & Rubinfeld, D: Microeconomics 5th ed. p. 370 Prentice-Hall 2001.
  27. ↑ Pindyck and Rubenfeld (2000) 325.
  28. ↑ Nicholson (1998) p. 551.
  29. ↑ Perfectly competitive firms are price takers. Price is exogenous and it is possible to associate each price with unique profit maximizing quantity. Besanko and Braeutigam, Microeconomics 2nd ed. (2005) p. 413.
  30. ↑ 30.0 30.1 Binger, B & Hoffman, E.: Microeconomics with Calculus, 2nd ed. Addison-Wesley 1998.
  31. ↑ Frank (2009) 377.
  32. ↑ Frank (2009) 377
  33. ↑ Frank (2009) 377
  34. ↑ Frank (2009) 378
  35. ↑ Depken, Craig (November 23, 2005). "10". Microeconomics Demystified. McGraw Hill. pp. 170. ISBN 0071459111. 
  36. ↑ The revolution in monopoly theory, by Glyn Davies and John Davies. Lloyds Bank Review, July 1984, no. 153, p. 38-52.
  37. ↑ Levine, David; Michele Boldrin (2008-09-07). Against intellectual monopoly. Cambridge University Press. pp. 312. ISBN 978-0521879286. http://www.dklevine.com/general/intellectual/againstfinal.htm. 
  38. ↑ Goodwin, N, Nelson, J; Ackerman, F & Weissskopf, T p. 315.
  39. ↑ Boyes and Melvin p.246.
  40. ↑ A perfectly competitive firm faces a perfectly elastic demand curve and has zero market power.
  41. ↑ Consumer surplus is the value of purchased goods above that which is paid in the market .Hirschey 508/
  42. ↑ Boyes and Melvin p. 449.
  43. ↑ Varian, H: 1992 p. 241.
  44. ↑ Perloff, J. 2009 p. 393.
  45. ↑ Boyes and Melvin page 449.
  46. ↑ Perloff, J. 2009. p. 393.
  47. ↑ Perloff, J.2009. p. 394.
  48. ↑ Besanko, D. & Beautigam, R, (2005) p. 449.
  49. ↑ Boyes and Melvin p.246.
  50. ↑ Boyes and Melvin p. 246.
  51. ↑ Perloff, J. (200() p. 394.
  52. ↑ Besanko, D. & Beautigam, R, 2005 p.448.
  53. ↑ Catialog retailers can use zip codes to male high priced catalogs to high income zip codes.Hall, R and Liberman M. Microeconomics theory and Applications 2nd ed. South_Western (2001) p. 263.
  54. ↑ Besanko, D. & Beautigam, R, 2005 p. 451
  55. ↑ If the monopolist is able to perfectly segment the market, then the average revenue curve effectively becomes the marginal revenue curve for the firm and the firm maximizes profits by equating price and marginal costs. That is the firm is behaving like a perfectly competitive firm. The monopolist will continue to see extra units as long as the extra revenue exceeds the marginal cost of production. The problem that the firm faces is that the firm must charge a different price for each successive unit sold.
  56. ↑ Varian, H: 1992 p. 242.
  57. ↑ Perloff, J.(2009) p.396.
  58. ↑ Besanko, D. & Beautigam, R, 2005 p. 449.
  59. ↑ Boyes and Melvin p. 449.
  60. ↑ Colander, David C. p. 269.
  61. ↑ Binger, B & Hoffman, E.: Microeconomics with Calculus, 2nd ed. 406 Addison-Wesley 1998.
  62. ↑ Samuelson, P. & Nordhaus, W.: Microeconomics, 17th ed. McGraw-Hill 2001
  63. ↑ Samuelson, W & Marks, S: p. 376. Managerial Economics 4th ed. Wiley 2005
  64. ↑ 64.0 64.1 Samuelson, W & Marks, S: 100. Managerial Economics 4th ed. Wiley 2003
  65. ↑ Frank, R., Microeconomics and Behavior 7th ed. (Mc-Graw-Hill) ISBN 978-007-126349-8.
  66. ↑ Frank, R., Microeconomics and Behavior 7th ed. (Mc-Graw-Hill) ISBN 978-007-126349-8.
  67. ↑ Frank, R., Microeconomics and Behavior 7th ed. (Mc-Graw-Hill) ISBN 978-007-126349-8.
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  72. ↑ BA/Virgin [2000] OJ L30/1
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  74. ↑ Aristotle: Politics: Book 1
  75. ↑ Aristotle, Politics
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  77. ↑ Ars technica The Victorian Internet
  78. ↑ EU competition policy and the consumer
  79. ↑ Leo Cendrowicz (2008-02-27). "Microsoft Gets Mother Of All EU Fines". Forbes. http://www.forbes.com/home/markets/2008/02/27/microsoft-eu-fines-markets-equity-cx_po_0227markets08.html. Retrieved 2008-03-10. 
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  81. ↑ Kevin J. O'Brien, IHT.com, Regulators in Europe fight for independence, International Herald Tribune, November 9, 2008, Accessed November 14, 2008.
  82. ↑ Milton Friedman, Free to Choose, p. 53-54
  83. ↑ In Praise of Private Infrastructure, Globe Asia, April 2008

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