Learning Objectives28.1 Define a natural monopoly and explain the average-cost pricing policy.. 28.1 NATURAL MONOPOLY 4 of 4Price Controls for a Natural Monopoly Under an average-cost p
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Economics
NINTH EDITION
Chapter 28
Controlling Market
Power:
Antitrust and Regulation
Trang 2Learning Objectives
28.1 Define a natural monopoly and explain the average-cost pricing policy.
28.2 List three features of antitrust policy.
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Picking an Output Level
MARGINAL PRINCIPLE
Increase the level of an activity as long as its marginal benefit exceeds its marginal cost Choose the level at which the marginal benefit equals the marginal cost.
Trang 428.1 NATURAL MONOPOLY (2 of 4)
Picking an Output Level
Because of the indivisible input (the pipe system), the long-run average-cost curve is negatively sloped
The monopolist chooses point a, where marginal revenue equals
marginal cost
The firm sells 70 million units of water at a price of $2.70 each
(point b) and an average cost of $2.10 (point c) The profit per
subscriber is $0.60 ($2.70 – $2.10)
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Will a Second Firm Enter?
The entry of a second cable firm would shift the demand curve of the typical firm to the left
After entry, the firm’s demand curve lies entirely below the long-run average-cost curve
No matter what price the firm charges, it will lose money Therefore, a second firm will not enter the market
Trang 628.1 NATURAL MONOPOLY (4 of 4)
Price Controls for a Natural Monopoly
Under an average-cost pricing policy, the government chooses the price
at which the demand curve intersects the long-run average-cost curve—
$12 per subscriber
Regulation decreases the price and increases the quantity
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APPLICATION 1
PUBLIC VERSUS PRIVATE WATERWORKS
APPLYING THE CONCEPTS #1: What is the rationale for regulating a natural monopoly?
In the early part of the nineteenth century in Great Britain, water was distributed by local government
The Industrial Revolution led to rapid urban growth
Lacking taxing power the local governments could not keep up with the demand and water distribution changed to private industry Problems with water distribution eventually led to Parliament to change back to public waterworks
Water is a natural monopoly and multiple companies could not earn enough profit to stay in business and offer adequate services
Trang 8APPLICATION 2
SATELLITE RADIO AS A NATURAL MONOPOLY
APPLYING THE CONCEPTS #2: When does a natural monopoly occur?
In 2008, the nation’s only two satellite radio providers, Sirius Satellite Radio and XM Satellite Radio, announced plans to merge into a single firm Together the two firms had 14 million subscribers, each paying $13 per month Both firms were losing money as they struggled to get enough subscribers to cover their substantial fixed costs
The proposed merger needed to be approved by the U.S Department of Justice and the Federal Communication Commission
The key question is whether the elimination of competition between the two firms would lead to higher prices, and how large any price hike would be
In evaluating the merits of the proposed merger, government regulators grappled with the trade-offs between saving costs by avoiding duplication and possible price hikes
The merger eventually led to greater options and lower costs to subscribers
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Trust
An arrangement under which the owners of several companies transfer their decision-making powers to a small group of trustees
Breaking Up Monopolies
One form of antitrust policy is to break up a monopoly into several smaller firms The label “antitrust” comes from the names of the early conglomerates that the government broke up
Trang 1028.2 ANTITRUST POLICY (2 of 6)
Blocking Mergers
Merger
A process in which two or more firms combine their operations
A horizontal merger involves two firms producing a similar product, for example, two producers of pet food.
A vertical merger involves two firms at different stages of the production process, for example, a sugar refiner and a candy producer.
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Blocking Mergers
Using the marginal principle, Staples picks the quantity at which its marginal revenue equals its marginal cost
In a city without a competing firm, Staples picks the
monopoly price of $14
In a city where Staples competes with Office Depot, the demand facing Staples is lower, so the profit- maximizing price is only $12
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Merger Remedy for Wonder Bread
In some cases, the government allows a merger to happen but imposes restrictions on the new company
TABLE 28.1 A Merger Increases Prices
Before Merger
After Merger
Before Merger
After Merger
Before Merger
After Merger
>0 $1.50 $1.50 $1.50 $1.50
Price $2.00 $2.00 $2.00 $2.20
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Regulating Business Practices
Tie-in sales
A business practice under which a business requires a consumer of one product to purchase another product
Predatory pricing
A firm sells a product at a price below its production cost to drive a rival out of business and then increases the price
Trang 1428.2 ANTITRUST POLICY (6 of 6)
A Brief History of U.S Antitrust Policy
Table 28.2 Key Antitrust Legislation
Sherman Act 1890 Made it illegal to monopolize a market or to engage in practices that result in a restraint of
trade.
Clayton Act 1914 Outlawed specific practices that discourage competition, including
tie-in sales contracts, price discrimination for the purpose of reducing competition, and stock-purchase mergers that would substantially reduce competition.
Federal Trade Commission Act 1914 Created a mechanism to enforce antitrust laws.
Robinson – Patman Act 1936 Prohibited selling products at “unreasonably low prices” with the intent of reducing
competition.
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APPLICATION 3
THE MERGER OF PENZOIL AND QUARTER STATE
APPLYING THE CONCEPTS #3: How does a merger affect prices?
In 1998, Pennzoil Motor Oils purchased Quaker State Motor oils in an acquisition valued at $1 billion The merger brought together two of the five brands of premium motor oil, with a combined market share of 38% (29% for Pennzoil and 9% for Quaker State)
The antitrust agencies approved the merger without any modifications A recent study of the merger concludes that the new company increased the price of the Quaker State products by roughly 5%, but did not change the price of Pennzoil products The market share of Pennzoil products increased, while the market shares of Quaker State products decreased
The study also examines the price effects of four other mergers In three of four cases, the merger increased prices, with price hikes between 3 and 7 percent The authors note that the modest price effects might be surprising to (1) people who expect relatively large positive price effects as firms exploit their greater market power and (2) people who expect negative price effects as the firms become more efficient
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MERGER OF OFFICE DEPOT AND OFFICEMAX
APPLYING THE CONCEPTS #4: What is the role of competition in the regulation of mergers?
In 2013 the Federal Trade Commission (FTC) approved the merger of Office Depot and OfficeMax
The FTC concluded that the merger of the second and third largest office supply superstores was unlikely to substantially reduce competition in the office supplies market
Other competition comes from general superstores such as Wal-Mart and Target and club stores such as Costco and Sam’s Club In addition, there is competition from Amazon and other Internet suppliers
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KEY TERMS
Merger
Predatory pricing
Tie-in sales
Trust