The Monopoly Problem Breaking up is hard to do. A story. Some theory. Public policy. John D....
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Transcript of The Monopoly Problem Breaking up is hard to do. A story. Some theory. Public policy. John D....
The Monopoly Problem
Breaking up is hard to do.
A story.Some theory.Public policy.
John D. Rockefeller, 1839-1937
Concepts
• Monopoly power• Deadweight loss• Blocked entry pricing• Stupid monopolist’s price• Contestable markets• Unnatural monopoly• Structuralist Theory• Merger Review Policy• Dumping• Target Pricing• Tullock Cost of Monopoly
Let’s return to Fishland
What is the problem?
• Big versus small?
• Just BIG?
• Reduced competition?
• Protection of competitors?
• A comfortable life for a favorite few?
• Restricted output?
Old competitive price
Stupid monopolist’s price
Entry blocking price
Stupid monopolist’s price
Concepts
• Monopoly power• Deadweight loss• Blocked entry pricing• Stupid monopolist’s price• Contestable markets• Unnatural monopoly• Structuralist Theory• Merger Review Policy• Dumping• Target Pricing• Tullock Cost of Monopoly
WHAT TO DO?
Option One: InterventionBreak up
Regulate
State ownership
State-sponsored competition
Option Two: Do nothing.
Dominant Antitrust TheoryStructuralist
Structure Conduct Performance
Structure is measured by concentration. Share of output accounted for by top 4, 10 or 20 firms.
High concentration leads to collusion, lack of cost control, higher prices, less response to consumers.
Non-competitive conduct leads to inefficient economic activity, less effective use of resources.
The concern is for HORIZONTAL mergers.
Merger Types
Horizontal: Firms that compete for the same consumer patronage.
Vertical: Firms that have a supplier/purchaser relationship.
Conglomerate: Firms that not related in either consumer or production relationships.
New Learning
Potential entry/ contestability
Competitive behavior.
Efficient use of resources.
Blocked Entry and/or Exit
Monopoly Power
Less Responsive Producers
Inefficient Use of Resources
An Example of State-sponsored Competition
EU approves Internet project
International Herald tribune, July 20, 2007, 11.
Germany won European Commission approval Thursday to put E120 million into an Internet search system being developed by companies including Bertelsmann and Thomson.
The benefit to the public of creating new technologies and putting more cultural material onto the Web outweighs the risk of giving selected companies an unfair advantage via subsidies, the top EEU body ruled in Brussels.
The $166 million program, called Theseus, is the German portion of a joint project with France, where it is called Quaero, to create a European rival to Google, the world’s most popular online search engine.
Schumpeter’s Creative Destruction
Monopoly just doesn’t matter, even if prices are raised and output is reduced.
Monopoly is temporary.
Unless government granted.
Preemptive Strike
Nip them in the bud!
U.S. Mergers: 1962-2006
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
U.S. Mergers per $1 Billion Real GDP
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
Merger Logic
• Market extension• Product extension• Economies of scale and scope• Brand name acquisition• Talent acquisition• Portfolio diversification, geographic & industrial• Learning• Monopoly power• Undervalued assets
Merger Policy
Prenotification
Review
Modification
Action
Concepts
• Monopoly power• Deadweight loss• Blocked entry pricing• Stupid monopolist’s price• Contestable markets• Unnatural monopoly• Structuralist Theory• Merger Review Policy• Dumping• Target Pricing• Tullock Cost of Monopoly
Dumping
Is it target pricing or
International price discrimination?
Remedy?
Price increase for consumers in all markets.
EU trade chief seeks to end light-bulb tariffInternational Herald-Tribune, July 14-15, 2007, 13
The European Union trade chief, Peter Mandelson, faces a new dispute over Chinese imports as he tries to eliminate anti-dumping duties on energy-saving light bulbs.
Mandelson told EU countries this week that the punitive tariffs should not be renewed, trade diplomats said.
The duties push up the price of energy-saving bulbs from China by as much as 60 percent, at a time when the EU is pursuing ambitious energy-saving targets to fight climate change.
Mandelson faces opposition from Germany, home to Osram, the biggest maker of energy-saving light bulbs in the EU.
“We favor globalization, but it has to be fair,” an Osram spokeswoman said. “Dumping is not fair competition.”
The opposite camp is the Dutch electronics group Philips, which imports large amounts of energy-saving light bulbs from China and wants the duties scrapped.
Light Bulb Analysis
0
50
100
150
200
250
300
350
0 1000 2000 3000 4000 5000 6000
Units
Pri
ce I
nd
ex
Philips Preferred Price
Osram’s Preferred Price
The Deadweight Loss of Government Granted Monopoly:
Gordon Tullock’s Contribution
Tullock
Costs
A Trapezoid of
Losses
Concepts
• Monopoly power• Deadweight loss• Blocked entry pricing• Stupid monopolist’s price• Contestable markets• Unnatural monopoly• Structuralist Theory• Merger Review Policy• Dumping• Target Pricing• Tullock Cost of Monopoly
Questions for Discussion
1. Just what is the monopoly problem?2. Why is breaking up a monopoly “hard to
do”?3. Should the state engage in merger
reviews? What are the relative merits of Schumpeter’s approach?
4. When might Gordon Tullock’s notion of deadweight loss be a relevant consideration?
