ECONOMICS- New Journal

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Other Costs/Benefits from Monopoly Power

How big are real-life deadweight losses?

Recall benchmark

Monopoly power brings

Product diversity/quality

Advertising

Informative

Persuasive

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Other Costs/Benefits from Monopoly Power…

Incentives for…

Investment

Innovation/R&D

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Role of Intellectual Property Rights

Disincentives for R&D can come from:

Strong patents for early generationsless incentives for later generations

Poorly defined boundaries of intellectual propertyrisk of litigationdon’t innovate

Incumbents build “thickets” of strategic patents tha cover little innovation and are just legal weapons to protect incumbents’ profitspatent trollslitigation risk high

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Costs of influencing regulation/restrictions

Lobbying and rent-seeking

What is rent-seeking?

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Regulation of Monopolies

Public Interest Theory: Government actions aimed at making monopoly outcome more competitive by keeping price closer to marginal cost serve public interest

Capture Theory: Regulation creates costs and benefits  Exchange/Capture is possibleserve industry

regulators work for interests of industry rather than public interest

Revolving door between industry and regulatory body

Competition policies can either:

Regulate acquisition of monopoly power (Antitrust legislation),

Regulate exercise of monopoly power (direct price regulations). Mostly confined to utilities in the U.S.

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Why Are Some Monopolies Regulated?

Why regulate?

Political pressure and economic concern about market dominance

If governments create monopolies they may regulate them to protect consumers

Create a monopoly to ensure that goods are produced at least cost  Natural Monopoly

A market is a natural monopoly when a good is produced at least cost by a single firm

Large fixed (sunk) costs

Average cost falls as quantity increases

Second firm may enter but this would cause costs to rise

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Natural Monopoly

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Natural Monopoly Regulation

First-best solution

Price at which P=MC  Aggregate surplus will be maximized

Problem….

Which leads to the Second-best solution

Social loss (DWL) vs. private loss (profit)

Who pays?

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Natural Monopoly Regulation—first best vs. second best, private loss vs DWL