Econ101November13 - Econ 101 I Types of monopolies a...

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Econ 101 November 13, 2007 I. Types of monopolies a. Natural Monopolies: minimum efficient scale is so large that a single firm dominates market i. Delivery requires construction of physical networks ii. Display decreasing or constant marginal cost, less than average total cost, over essentially all quantities iii. Thus, ATC is always declining and the minimum efficient scale is much larger than the size of the market iv. Often regulated b. Good Monopoly: sometimes monopoly profits provide incentive to research and develop new creations i. Patent protection provides strong incentive for new products ii. If there weren’t patents, other companies would steal c. Patents, copyrights, licenses: government protection of a firm’s right to produce d. Entry Barrier: economic and legal restrictions that make entry more difficult for new competitors that existing competitors did not pay II. Should the government regulate monopolies? a. Essentially all monopolies are regulated i. Natural monopolies are regulated by price commissions that
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Unformatted text preview: determines rates of charging ii. Patent, copyright, and license protections are a form of ex ante regulations: firms that follow the rules receive protection III. Competition among the few (Oligopoly) a. Sometimes products are differentiated, or homogenous b. Very few sellers c. Entry is limited either by legal restrictions (banking in most of the world) or by a very large minimum efficient scale (overnight mail service) d. How they compete i. Firms know there are only few competitors ii. Take account of the effects of their actions on the overall market iii. Use Game theory 1. All players are specified in advance: you know your competitors 2. You know the list of possible actions 3. Payoffs: the amount each player gets for every possible combination of the players’ actions 4. Nash non-competitive equilibrium is the set of actions for all players that no player can improve his or her payoff by playing a different action...
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