class: center, middle, inverse, title-slide # Monopoly & Antitrust ## EC 201: Principles of Microeconomics ### Kyle Raze ### Winter 2020 --- class: inverse, middle # Prologue --- # Housekeeping **Final exam:** Next week! - Details next lecture. -- **Canvas:** New practice problems .mono[+] discussion worksheets. -- **Wednesday lecture:** Final exam review. - Come prepared with questions! - Syllabus update: no podcast. -- **Friday discussion:** Monopoly worksheet .mono[+] practice problems. --- # Market Failure ## Causes 1. Absence of property rights. - Externalities. - Public goods. 2. Market power. - *e.g.,* monopoly (today). 3. Asymmetric information. --- class: inverse, middle # Monopoly --- # Monopoly ## Conditions 1. One seller. 2. Unique product without close substitutes. 3. Barriers to entry. -- ## Result **Market power:** A monopolist has the ability to influence market prices. - A monopolist is a **price maker**. --- # Monopoly ## Examples? **Q:** Is Google a monopolist? .purple[Why] or .pink[why not]? -- - .purple[Most popular search engine by far .mono[+] huge, vertically integrated company .mono[+] ability to purchase potential new competitors.] - .pink[Competes with Apple, Amazon, and Microsoft.] -- **A:** .pink[Not a monopolist, but has market power.] --- # Monopoly ## Examples? **Q:** Is Comcast a monopolist? .purple[Why] or .pink[why not]? -- - .purple[Sole internet provider in many areas .mono[+] huge, vertically integrated company .mono[+] high barriers to entry.] - .pink[Competes with Verizon in some areas.] -- **A:** .purple[Depending on where you live, yes.] --- # Monopoly ## Examples? **Q:** Is the only hardware store in a small town a monopolist? .purple[Why] or .pink[why not]? -- - .purple[No direct competitors in town .mono[+] small size of market deters entrants.] - .pink[A grocery store might carry some of the same products.] -- **A:** .purple[Yes, provided that there sufficiently few indirect competitors.] --- # Sources of Monopoly Power ## Exclusive control of resources A firm can keep out potential competitors by buying up essential resources for production. -- **Examples** - Early 1900s: Aluminum manufacturer ALCOA owned 90% of the global bauxite supply. - De Beers owned most of the world's raw diamonds until the mid-2000s. --- # Sources of Monopoly Power ## Difficulty raising capital Incumbent monopolists are often large .mono[-->] new competitors would need a lot of money to compete effectively! - Chances of competing against entrenched monopolist are low .mono[-->] risky investment for lenders. -- **Example:** Operating systems. - Supplanting Windows 10 as the leading operating system for PCs would require vast amounts of capital. - A lender would pick Microsoft over your start-up to develop the next big operating system. --- # Sources of Monopoly Power ## Economies of scale Some industries feature immense upfront fixed costs, but low marginal costs thereafter. - Tendency for consolidation over time. -- **Examples:** Natural monopolies. - Electricity and water. - Cable internet and television. - Railroads. --- # Sources of Monopoly Power ## Licensing Governments establish monopolies with licensing requirements. - Licensing requirement .mono[=] legal barrier to entry. **Rationale:** Minimize negative externalities or exploit economies of scale. -- **Examples** - Trash collection. - Taxi medallions. - Occupational licenses. --- # Sources of Monopoly Power ## Patents and copyright law Governments issue exclusive rights to sell a particular good or service for a fixed amount of time. - Exclusive rights .mono[-->] monopoly. **Tradeoff:** Market power *vs.* innovation. -- **Examples** - New prescription drugs. - Books and music. --- # Monopolists *vs.* Competitive Firms Consumers of a particular firm's product have .pink[fewer alternatives] in a monopolistic market than in a perfectly competitive market. .pull-left[ .center[**Monopolist**] <img src="16-Monopoly_files/figure-html/unnamed-chunk-1-1.svg" style="display: block; margin: auto;" /> ] .pull-right[ .center[**Perfectly Competitive Firm**] <img src="16-Monopoly_files/figure-html/unnamed-chunk-2-1.svg" style="display: block; margin: auto;" /> ] --- # Marginal Revenue .more-left[ <img src="16-Monopoly_files/figure-html/unnamed-chunk-3-1.svg" style="display: block; margin: auto;" /> ] .less-right[ .pink[**Price effect:**] As price decreases, existing customers pay less. .purple[**Output effect:**] As price decreases, new customers purchase goods. ] --- count: false # Marginal Revenue .more-left[ <img src="16-Monopoly_files/figure-html/unnamed-chunk-4-1.svg" style="display: block; margin: auto;" /> ] .less-right[ .pink[**Price effect:**] As price decreases, existing customers pay less. .purple[**Output effect:**] As price decreases, new customers purchase goods. .purple[Output effect] <br> `\(\quad\)` .mono[>] .pink[price effect] .mono[==>] <br> price cut .green[increases revenue]. ] --- count: false # Marginal Revenue .more-left[ <img src="16-Monopoly_files/figure-html/unnamed-chunk-5-1.svg" style="display: block; margin: auto;" /> ] .less-right[ .pink[**Price effect:**] As price decreases, existing customers pay less. .purple[**Output effect:**] As price decreases, new customers purchase goods. .purple[Output effect] <br> `\(\quad\)` .mono[>] .pink[price effect] .mono[==>] <br> price cut .green[increases revenue]. ] --- # Marginal Revenue .more-left[ <img src="16-Monopoly_files/figure-html/unnamed-chunk-6-1.svg" style="display: block; margin: auto;" /> ] .less-right[ .pink[**Price effect:**] As price decreases, existing customers pay less. .purple[**Output effect:**] As price decreases, new customers purchase goods. ] --- count: false # Marginal Revenue .more-left[ <img src="16-Monopoly_files/figure-html/unnamed-chunk-7-1.svg" style="display: block; margin: auto;" /> ] .less-right[ .pink[**Price effect:**] As price decreases, existing customers pay less. .purple[**Output effect:**] As price decreases, new customers purchase goods. .purple[Output effect] <br> `\(\quad\)` .mono[=] .pink[price effect] .mono[==>] <br> price cut .green[does not change revenue]. ] --- count: false # Marginal Revenue .more-left[ <img src="16-Monopoly_files/figure-html/unnamed-chunk-8-1.svg" style="display: block; margin: auto;" /> ] .less-right[ .pink[**Price effect:**] As price decreases, existing customers pay less. .purple[**Output effect:**] As price decreases, new customers purchase goods. .purple[Output effect] <br> `\(\quad\)` .mono[=] .pink[price effect] .mono[==>] <br> price cut .green[does not change revenue]. ] --- # Marginal Revenue .more-left[ <img src="16-Monopoly_files/figure-html/unnamed-chunk-9-1.svg" style="display: block; margin: auto;" /> ] .less-right[ .pink[**Price effect:**] As price decreases, existing customers pay less. .purple[**Output effect:**] As price decreases, new customers purchase goods. ] --- count: false # Marginal Revenue .more-left[ <img src="16-Monopoly_files/figure-html/unnamed-chunk-10-1.svg" style="display: block; margin: auto;" /> ] .less-right[ .pink[**Price effect:**] As price decreases, existing customers pay less. .purple[**Output effect:**] As price decreases, new customers purchase goods. .purple[Output effect] <br> `\(\quad\)` .mono[<] .pink[price effect] .mono[==>] <br> price cut .green[decreases revenue]. ] --- count: false # Marginal Revenue .more-left[ <img src="16-Monopoly_files/figure-html/unnamed-chunk-11-1.svg" style="display: block; margin: auto;" /> ] .less-right[ .pink[**Price effect:**] As price decreases, existing customers pay less. .purple[**Output effect:**] As price decreases, new customers purchase goods. .purple[Output effect] <br> `\(\quad\)` .mono[<] .pink[price effect] .mono[==>] <br> price cut .green[decreases revenue]. ] --- # Marginal Revenue .more-left[ <img src="16-Monopoly_files/figure-html/unnamed-chunk-12-1.svg" style="display: block; margin: auto;" /> ] .less-right[ ## Definition > Change in total revenue that arises from a one-unit increase in output. ] --- # Marginal Revenue .more-left[ <img src="16-Monopoly_files/figure-html/unnamed-chunk-13-1.svg" style="display: block; margin: auto;" /> ] .less-right[ A monopolist faces a downward-sloping MR curve. - MR .mono[>] $0 .mono[-->] increasing revenue. - MR .mono[=] $0 .mono[-->] maximum revenue. - MR .mono[<] $0 .mono[-->] decreasing revenue. ] --- # Profit Maximization .more-left[ <img src="16-Monopoly_files/figure-html/unnamed-chunk-14-1.svg" style="display: block; margin: auto;" /> ] .less-right[ **Q:** How does a monopolist maximize profit? ] --- count: false # Profit Maximization .more-left[ <img src="16-Monopoly_files/figure-html/unnamed-chunk-15-1.svg" style="display: block; margin: auto;" /> ] .less-right[ **Q:** How does a monopolist maximize profit? **A:** Two steps! - **Step 1:** .pink[Pick Q.sub[M] where MR .mono[=] MC.] ] --- count: false # Profit Maximization .more-left[ <img src="16-Monopoly_files/figure-html/unnamed-chunk-16-1.svg" style="display: block; margin: auto;" /> ] .less-right[ **Q:** How does a monopolist maximize profit? **A:** Two steps! - **Step 1:** .pink[Pick Q.sub[M] where MR .mono[=] MC.] ] --- count: false # Profit Maximization .more-left[ <img src="16-Monopoly_files/figure-html/unnamed-chunk-17-1.svg" style="display: block; margin: auto;" /> ] .less-right[ **Q:** How does a monopolist maximize profit? **A:** Two steps! - **Step 1:** .pink[Pick Q.sub[M] where MR .mono[=] MC.] ] --- count: false # Profit Maximization .more-left[ <img src="16-Monopoly_files/figure-html/unnamed-chunk-18-1.svg" style="display: block; margin: auto;" /> ] .less-right[ **Q:** How does a monopolist maximize profit? **A:** Two steps! - **Step 1:** .pink[Pick Q.sub[M] where MR .mono[=] MC.] - **Step 2:** .pink[Set P.sub[M] on the demand curve.] ] --- count: false # Profit Maximization .more-left[ <img src="16-Monopoly_files/figure-html/unnamed-chunk-19-1.svg" style="display: block; margin: auto;" /> ] .less-right[ **Q:** How does a monopolist maximize profit? **A:** Two steps! - **Step 1:** .pink[Pick Q.sub[M] where MR .mono[=] MC.] - **Step 2:** .pink[Set P.sub[M] on the demand curve.] ] --- count: false # Profit Maximization .more-left[ <img src="16-Monopoly_files/figure-html/unnamed-chunk-20-1.svg" style="display: block; margin: auto;" /> ] .less-right[ **Q:** How does a monopolist maximize profit? **A:** Two steps! - **Step 1:** .pink[Pick Q.sub[M] where MR .mono[=] MC.] - **Step 2:** .pink[Set P.sub[M] on the demand curve.] ] --- count: false # Profit Maximization .more-left[ <img src="16-Monopoly_files/figure-html/unnamed-chunk-21-1.svg" style="display: block; margin: auto;" /> ] .less-right[ **Q:** How does a monopolist maximize profit? **A:** Two steps! - **Step 1:** .pink[Pick Q.sub[M] where MR .mono[=] MC.] - **Step 2:** .pink[Set P.sub[M] on the demand curve.] Profit .mono[=] (P.sub[M] .mono[-] ATC) × Q.sub[M] ] --- count: false # Profit Maximization .more-left[ <img src="16-Monopoly_files/figure-html/unnamed-chunk-22-1.svg" style="display: block; margin: auto;" /> ] .less-right[ **Q:** How does a monopolist maximize profit? **A:** Two steps! - **Step 1:** .pink[Pick Q.sub[M] where MR .mono[=] MC.] - **Step 2:** .pink[Set P.sub[M] on the demand curve.] Profit .mono[=] (P.sub[M] .mono[-] ATC) × Q.sub[M] <br> `\(\quad\)` .mono[=] ($16 .mono[-] $10) × 4 ] --- count: false # Profit Maximization .more-left[ <img src="16-Monopoly_files/figure-html/unnamed-chunk-23-1.svg" style="display: block; margin: auto;" /> ] .less-right[ **Q:** How does a monopolist maximize profit? **A:** Two steps! - **Step 1:** .pink[Pick Q.sub[M] where MR .mono[=] MC.] - **Step 2:** .pink[Set P.sub[M] on the demand curve.] Profit .mono[=] (P.sub[M] .mono[-] ATC) × Q.sub[M] <br> `\(\quad\)` .mono[=] ($16 .mono[-] $10) × 4 <br> `\(\quad\)` .mono[=] $24. ] --- # Perfect Competition *vs.* Monopoly .pull-left[ .center[**Competitive Market**] <img src="16-Monopoly_files/figure-html/unnamed-chunk-24-1.svg" style="display: block; margin: auto;" /> ] --- count: false # Perfect Competition *vs.* Monopoly .pull-left[ .center[**Competitive Market**] <img src="16-Monopoly_files/figure-html/unnamed-chunk-25-1.svg" style="display: block; margin: auto;" /> ] .pull-right[ .center[**Monopoly**] <img src="16-Monopoly_files/figure-html/unnamed-chunk-26-1.svg" style="display: block; margin: auto;" /> ] --- # Perfect Competition *vs.* Monopoly .pull-left[ ## .purple[Competitive Market] 1. .purple[Many] firms. 2. .purple[No] firm can earn .purple[long-run economic profits]. 3. Each firm is a .purple[**price taker**] <br> .mono[-->] no market power! 4. Each firm produces .purple[efficient] level of output <br> .mono[-->] *i.e.,* where P .mono[=] MC. ] -- .pull-right[ ## .pink[Monopoly] 1. .pink[One] firm. 2. Monopolist can earn .pink[long-run economic profits]. 3. Monopolist is a .pink[**price maker**] <br> .mono[-->] significant market power! 4. Monopolist produces .pink[inefficient] level of output <br> .mono[-->] *i.e.,* where P .mono[>] MC. ] --- # Social Consequences .more-left[ <img src="16-Monopoly_files/figure-html/unnamed-chunk-27-1.svg" style="display: block; margin: auto;" /> ] .less-right[ ## Inefficiency Monopolies fail to maximize total surplus. - Q.sub[M] .mono[<] Q.sub[C] .mono[==>] <br> .orange[deadweight loss]. ] --- # Social Consequences .more-left[ <img src="16-Monopoly_files/figure-html/unnamed-chunk-28-1.svg" style="display: block; margin: auto;" /> ] .less-right[ ## Inefficiency Monopolies fail to maximize total surplus. - Q.sub[M] .mono[<] Q.sub[C] .mono[==>] <br> .orange[deadweight loss]. Monopolies .purple[reduce] consumer surplus. ] --- # Social Consequences ## Limited choices for consumers Monopolists face few incentives to compete for customers. - **Result:** Fewer product lines .mono[+] lower quality. - **Example:** Cable companies and bundled services. -- ## Rent seeking Monopolists can use political processes to preempt competition or secure new monopolies. - A form of competition, but not the good kind. - **Example:** Lobbying Congress for trade protections. --- # Monopoly ## Solutions? 1. Antitrust law. - *e.g,.* breaking up monopolies, blocking mergers, *etc.* 2. Regulation. - *e.g.,* price controls. 3. In the case of monopsony, unions? 4. Wait for technological disruptions. - *e.g.,* rise of mobile devices reduced Microsoft's market share. --- class: inverse, middle # Antitrust --- # Antitrust ## History Technological innovations during the 1800s created economies of scale. - **Result:** Consolidation of industries into national *trusts*..super[.pink[<span>†</span>]] .footnote[.pink[<span>†</span>]: *Trust* .mono[=] An organization of colluding or jointly-owned companies.] - **Example:** Standard Oil. -- Sherman Antitrust Act of 1890 made anti-competitive business practices illegal. - Eventually used to break-up trusts like Standard Oil and block mergers. --- # Antitrust ## History Over time, courts started to rule in favor of small incumbent firms over national entrants. - Small incumbents had local monopoly power! -- Eventually, federal courts adopted the .pink[Consumer Welfare Standard]. - **Q:** Would a merger increase consumer surplus? - If yes, let the merger happen. - If no, block the merger. -- - Still governs antitrust law today. --- # Mergers ## Market definition .pink[**Product market**] - **Q:** Are there .pink[substitutes] for the merging firms' good? -- .purple[**Geographic market**] - **Q:** Is the market .purple[local or national?] -- **Bottom line** - Larger markets make mergers look better. - Smaller markets make mergers look worse. --- # Mergers .more-left[ <img src="16-Monopoly_files/figure-html/unnamed-chunk-29-1.svg" style="display: block; margin: auto;" /> ] .less-right[ All else being equal, industry consolidation creates .orange[deadweight loss]. ] --- count: false # Mergers .more-left[ <img src="16-Monopoly_files/figure-html/unnamed-chunk-30-1.svg" style="display: block; margin: auto;" /> ] .less-right[ All else being equal, industry consolidation creates .orange[deadweight loss]. In some cases, consolidation can reduce marginal costs. Possible to .pink[increase] consumer surplus relative to original competitive equilibrium. ] --- count: false # Mergers .more-left[ <img src="16-Monopoly_files/figure-html/unnamed-chunk-31-1.svg" style="display: block; margin: auto;" /> ] .less-right[ All else being equal, industry consolidation creates .orange[deadweight loss]. In some cases, consolidation can reduce marginal costs. Possible to .pink[increase] consumer surplus relative to original competitive equilibrium. ] --- class: clear-slide **Podcast Question:** True or false? According to Charlotte Slaiman, mergers usually result in lower prices for consumers. > **A.** True. > **B.** False. --- count: false class: clear-slide **Podcast Question:** True or false? According to Charlotte Slaiman, mergers usually result in lower prices for consumers. > **A.** True. > .pink[**B.** False.] --- class: inverse, middle # Regulation --- # Regulating Monopoly ## Options 1. Mandate marginal cost pricing? - Make monopolist choose quantity where price equals marginal cost. 2. Have the government take over the monopoly? - Not always better. 3. Subsidize the monopolist? - Politically unpopular in most cases. --- # Regulating Monopoly .more-left[ <img src="16-Monopoly_files/figure-html/unnamed-chunk-32-1.svg" style="display: block; margin: auto;" /> ] .less-right[ **Q:** Can a price ceiling at the competitive price eliminate .orange[deadweight loss]? ] --- count: false # Regulating Monopoly .more-left[ <img src="16-Monopoly_files/figure-html/unnamed-chunk-33-1.svg" style="display: block; margin: auto;" /> ] .less-right[ **Q:** Can a price ceiling at the competitive price eliminate deadweight loss? ] --- count: false # Regulating Monopoly .more-left[ <img src="16-Monopoly_files/figure-html/unnamed-chunk-34-1.svg" style="display: block; margin: auto;" /> ] .less-right[ **Q:** Can a price ceiling at the competitive price eliminate deadweight loss? ] --- count: false # Regulating Monopoly .more-left[ <img src="16-Monopoly_files/figure-html/unnamed-chunk-35-1.svg" style="display: block; margin: auto;" /> ] .less-right[ **Q:** Can a price ceiling at the competitive price eliminate deadweight loss? ] --- count: false # Regulating Monopoly .more-left[ <img src="16-Monopoly_files/figure-html/unnamed-chunk-36-1.svg" style="display: block; margin: auto;" /> ] .less-right[ **Q:** Can a price ceiling at the competitive price eliminate deadweight loss? ] --- count: false # Regulating Monopoly .more-left[ <img src="16-Monopoly_files/figure-html/unnamed-chunk-37-1.svg" style="display: block; margin: auto;" /> ] .less-right[ **Q:** Can a price ceiling at the competitive price eliminate deadweight loss? **A:** .pink[Yes!] ] --- class: clear-slide **Q:** Can a tax eliminate .orange[deadweight loss] from the monopoly?.super[.pink[<span>†</span>]] .footnote[.pink[<span>†</span>]: Assume that there are no negative externalities.] .more-left[ <img src="16-Monopoly_files/figure-html/unnamed-chunk-38-1.svg" style="display: block; margin: auto;" /> ] .less-right[ > **A.** Yes. > **B.** No. > **C.** Depends ] --- count: false class: clear-slide **Q:** Can a tax eliminate .orange[deadweight loss] from the monopoly?.super[.pink[<span>†</span>]] .footnote[.pink[<span>†</span>]: Assume that there are no negative externalities.] .more-left[ <img src="16-Monopoly_files/figure-html/unnamed-chunk-39-1.svg" style="display: block; margin: auto;" /> ] .less-right[ > **A.** Yes. > .pink[**B.** No.] > **C.** Depends. ] --- # Regulating Natural Monopoly .more-left[ <img src="16-Monopoly_files/figure-html/unnamed-chunk-40-1.svg" style="display: block; margin: auto;" /> ] .less-right[ ## Price Ceiling Some natural monopolies are not profitable under marginal cost pricing. ] --- count: false # Regulating Natural Monopoly .more-left[ <img src="16-Monopoly_files/figure-html/unnamed-chunk-41-1.svg" style="display: block; margin: auto;" /> ] .less-right[ ## Price Ceiling Some natural monopolies are not profitable under marginal cost pricing. Losses <br> .mono[-->] monopolist exits <br> .mono[-->] market ceases to exist <br> .mono[-->] even less total surplus than before! ]