11 - I Antitrust Law o A Monopoly produces an inefficient...

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I. Antitrust Law o A. Monopoly produces an inefficient outcome 1. Because a single price monopoly produces too low a quantity. 2. Discriminatory monopoly solves some of this, but may allocate inefficiently 3. Plus rent seeking problem. a. Imagine a valley into which, in 1900, it will be profitable to build a rail line. b. There will never be enough business to justify a second line, so the first will make monopoly profits. c. The way you get to be the monopoly and collect the monopoly profit is to build first. d. So the line gets built prematurely. e. More generally, if there is room for competition to become the monopoly, potential monopolists compete away the monopoly profit inthe process of becoming actual monopolists. o B. One approach to eliminating the inefficient outcome is to prevent monopolies from existing. 1. Not workable for a real natural monopoly. 2. But perhaps for preventing monopoly-by-merger or preventing cartels 3. Or artificial monopolies ? But that assumes that predatory pricing works, and it probably doesn't. 4. And very workable for government monopolies. Just say no. o C. Another is to regulate monopolies (public utility regulation and the like) to try to make them behave more efficiently. This has problems. 1. To make them produce the efficient quantity, you need to know their cost curves, and don't. 2. You need a way of covering their losses to keep them in business. 3. And we need a way of making it in the regulator's interest to try to produce the efficient outcome. o D. Some behavior has been regarded as monopolistic, but perhaps incorrectly. 1. Resale price maintanance. a. Do it to produce a monopoly, share the gains with the retailers? b. But raising the wholesale price does the same thing without the sharing. c. A way of getting tie-in services? The wholesaler sets a retail price above the competitive level, and the retailers then compete for customers via desirable forms of non-price competition, such as fancy showrooms. 2. Tie-in sales (you have to use our punch cards with our computer). a. The standard bad argument: a way of using a monopoly on computers to get monopoly profits on punch cards, but . ..
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b. The more expensive the punch cards are that you require your customers to use, the less they will pay for your computer, so you are taking money out of one pocket to put it in another. c. A more plausible explanation is that it is a device for discriminatory pricing. If you think the customers who would pay a high price are the ones using your computer a lot, and would therefore also be the ones paying a lot extra for the expensive punch cards, then tie-in sales are a way of charging a higher price to those willing to pay it.
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This note was uploaded on 04/05/2012 for the course ECON 395 taught by Professor Beckett during the Fall '11 term at Rutgers.

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11 - I Antitrust Law o A Monopoly produces an inefficient...

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