I. Antitrust Law
- 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.
- 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.
- 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.
- 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 ...
- 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.
- d. Of course, there could also be unrelated
reasons--such as wanting to control the quality of inputs
so that your product won't get an undeservedly bad
reputation for breaking down.
{This section contains links to
Chapter
10 of Price Theory, which explains monopoly, and
Chapter
16, which explains why it is inefficient.}