Chapter%2013 - Econ 160, Vardanyan Chapter 13 Market...

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Econ 160, Vardanyan 1 Chapter 13 Market Structure and Public Policy In this chapter we will look at how policymakers deal with markets that are dominated by a small number of firms. We start with a natural monopoly–a situation in which the scale economies in production are so large that only one firm can survive. We will then look at how the government can promote competition by performing an antitrust policy and by blocking mergers. Natural Monopoly So far we have considered monopolies that result from artificial barriers to entry (patents, licenses). Some production technologies, such as water systems, electricity transmission, cable TV services, are characterized by economies of scale so large that only one firm can survive in the market. In other words, it would be inefficient for a city to have several sets of cables for TV service when only one would suffice. Consider an example in which one large firm provides cable TV services (Fig. 13.1). The cost of installing and maintaining the system of cables is rather large, so the firm is a natural monopoly. The firm’s long-run average cost curve is steep, reflecting large economies of scale (i.e. the cables system can be used to service 70 or 70,000 customers, so that the average cost falls abruptly with an increase in the number of subscribers). The long-run marginal cost, the cost of connecting each additional subscriber, is constant. The
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Chapter%2013 - Econ 160, Vardanyan Chapter 13 Market...

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