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Unformatted text preview: Chapter 12 Monopoly and Its Regulation Preparation. In this note you will encounter the following ideas: Pure monopoly. Natural monopoly. Marginal revenue. Marginal cost. Producers Surplus. Profit-maximizing quantity supplied. Socially efficient quantity supplied. Monopolistic deadweight loss. Predatory pricing. Anti-trust regulations. Price-ceiling regulation of a monopoly. Average-cost pricing regulation of a monopoly. Breaking-up a monopoly as a form of regulation. Pigovian subsidy and tax regulation of a monopoly. Monopolistic price discrimination. 335 336 CHAPTER 12. MONOPOLY & ITS REGULATION Consult the index of your textbook and review what your book has to say about these topics before coming to class. Motivation. In this chapter we will examine the powerful advantages enjoyed by a monopolist and see how this power can be used to increase the profitability of such a firm at the same time as gains to consumers are reduced. We shall also see that the typical choices made by a monopoly create sometimes very substantial deadweight losses. This will leave us with a regulatory question of what can be done to induce a profit-seeking monopolist to alter its behavior so as to at least reduce, perhaps even to eliminate, the deadweight loss it causes. Today monopolies supply only about 3% of the value of all US produced goods and services. This is quite different from a century ago for then monopolistic firms generated about one-sixth of the total value of US production. Monopolies controlled railroads, telegraph services, oil production and distribution, and steel manufacturing to name only some. The public of that time understood well that these monopolies caused there to be high prices for their products and ruthlessly eliminated any who dared to try to compete with them. The public outcry became so loud that the US Congress in the 1890s commenced what became a long legislative battle to regulate these monopolies, a battle that continues today. Eventually these legal initiatives resulted in the breakup of some of the largest monopolies. A prominent example is the breakup of Standard Oil, the monopoly oil producer and distributor created by David Rockefeller Sr., who is perhaps the best known of all of the American monopolists. Standard Oil was ordered by the courts to be broken up into competing smaller oil companies, some of which will be known to you by names such as Exxon, Chevron and Mobil. In the 1960s a similar breakup was ordered of the famous Bell telephone company after it was determined to be a US monopoly supplier of telephone services. Bell was broken up into competing smaller phone companies that became called the Baby Bells. Verizon, Sprint and MCI are some of the telephone companies that have evolved from the Baby Bells....
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- Spring '08