An Economic Analysis of Antitrust Law's Natural Monopoly Cases
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Microeconomics Exam Review Chapters 8 Through 12, 16, 17 and 19
MICROECONOMICS EXAM REVIEW CHAPTERS 8 THROUGH 12, 16, 17 AND 19 Key Terms and Concepts to Know CHAPTER 8 - PERFECT COMPETITION I. An Introduction to Perfect Competition A. Perfectly Competitive Market Structure: • Has many buyers and sellers. • Sells a commodity or standardized product. • Has buyers and sellers who are fully informed. • Has firms and resources that are freely mobile. • Perfectly competitive firm is a price taker; one firm has no control over price. B. Demand Under Perfect Competition: Horizontal line at the market price II. Short-Run Profit Maximization A. Total Revenue Minus Total Cost: The firm maximizes economic profit by finding the quantity at which total revenue exceeds total cost by the greatest amount. B. Marginal Revenue Equals Marginal Cost in Equilibrium • Marginal Revenue: The change in total revenue from selling another unit of output: • MR = ΔTR/Δq • In perfect competition, marginal revenue equals market price. • Market price = Marginal revenue = Average revenue • The firm increases output as long as marginal revenue exceeds marginal cost. • Golden rule of profit maximization. The firm maximizes profit by producing where marginal cost equals marginal revenue. C. Economic Profit in Short-Run: Because the marginal revenue curve is horizontal at the market price, it is also the firm’s demand curve. The firm can sell any quantity at this price. III. Minimizing Short-Run Losses The short run is defined as a period too short to allow existing firms to leave the industry. The following is a summary of short-run behavior: A. Fixed Costs and Minimizing Losses: If a firm shuts down, it must still pay fixed costs. -
1 Bertrand Model
ECON 312: Oligopolisitic Competition 1 Industrial Organization Oligopolistic Competition Both the monopoly and the perfectly competitive market structure has in common is that neither has to concern itself with the strategic choices of its competition. In the former, this is trivially true since there isn't any competition. While the latter is so insignificant that the single firm has no effect. In an oligopoly where there is more than one firm, and yet because the number of firms are small, they each have to consider what the other does. Consider the product launch decision, and pricing decision of Apple in relation to the IPOD models. If the features of the models it has in the line up is similar to Creative Technology's, it would have to be concerned with the pricing decision, and the timing of its announcement in relation to that of the other firm. We will now begin the exposition of Oligopolistic Competition. 1 Bertrand Model Firms can compete on several variables, and levels, for example, they can compete based on their choices of prices, quantity, and quality. The most basic and funda- mental competition pertains to pricing choices. The Bertrand Model is examines the interdependence between rivals' decisions in terms of pricing decisions. The assumptions of the model are: 1. 2 firms in the market, i 2 f1; 2g. 2. Goods produced are homogenous, ) products are perfect substitutes. 3. Firms set prices simultaneously. 4. Each firm has the same constant marginal cost of c. What is the equilibrium, or best strategy of each firm? The answer is that both firms will set the same prices, p1 = p2 = p, and that it will be equal to the marginal ECON 312: Oligopolisitic Competition 2 cost, in other words, the perfectly competitive outcome. -
Amazon's Antitrust Paradox
LINA M. KHAN Amazon’s Antitrust Paradox abstract. Amazon is the titan of twenty-first century commerce. In addition to being a re- tailer, it is now a marketing platform, a delivery and logistics network, a payment service, a credit lender, an auction house, a major book publisher, a producer of television and films, a fashion designer, a hardware manufacturer, and a leading host of cloud server space. Although Amazon has clocked staggering growth, it generates meager profits, choosing to price below-cost and ex- pand widely instead. Through this strategy, the company has positioned itself at the center of e- commerce and now serves as essential infrastructure for a host of other businesses that depend upon it. Elements of the firm’s structure and conduct pose anticompetitive concerns—yet it has escaped antitrust scrutiny. This Note argues that the current framework in antitrust—specifically its pegging competi- tion to “consumer welfare,” defined as short-term price effects—is unequipped to capture the ar- chitecture of market power in the modern economy. We cannot cognize the potential harms to competition posed by Amazon’s dominance if we measure competition primarily through price and output. Specifically, current doctrine underappreciates the risk of predatory pricing and how integration across distinct business lines may prove anticompetitive. These concerns are height- ened in the context of online platforms for two reasons. First, the economics of platform markets create incentives for a company to pursue growth over profits, a strategy that investors have re- warded. Under these conditions, predatory pricing becomes highly rational—even as existing doctrine treats it as irrational and therefore implausible. -
Apple and Amazon's Antitrust Antics
APPLE AND AMAZON’S ANTITRUST ANTICS: TWO WRONGS DON’T MAKE A RIGHT, BUT MAYBE THEY SHOULD Kerry Gutknecht‡ I. INTRODUCTION The exploding market for books of all kinds in the form of digital files (“e- books”), which can be read on mobile devices and personal computers, has attracted aggressive competition between the two leading online e-book retail- ers, Amazon, Inc. (“Amazon”) and Apple Inc. (“Apple”).1 While both Amazon and Apple have been accused by critics of engaging in anticompetitive practic- es with regard to e-book sales,2 the U.S. Department of Justice has focused on Apple. In 2012, federal prosecutors brought an antitrust suit against Apple and five of the nation’s largest book publishers—HarperCollins Publishers LLC (“HarperCollins”), Hachette Book Group, Inc. and Hachette Digital (“Hachette”); Holtzbrinck Publishers, LLC d/b/a Macmillan (“Macmillan”); Penguin Group (USA), Inc. (“Penguin”); and Simon & Schuster, Inc. and (“Simon & Schuster”) (collectively, the “Publisher Defendants”)3—for collud- ing in violation of the Sherman Act to raise the retail prices of e-books.4 Each ‡ J.D. Candidate, May 2014, The Catholic University of America, Columbus School of Law. The author would like to thank Calla Brown for her daily support and the CommLaw Conspectus staff for their diligent effort during the writing and editing process. Finally, a special thanks to Antonio F. Perez for providing expert advice during the writing of this paper. 1 Complaint at 2–3, United States v. Apple Inc., 952 F. Supp. 2d 638 (S.D.N.Y. 2013) (No. 12 CV 2826) [hereinafter Complaint]. -
The Marginal Cost Controversy in Intellectual Property John F Duffyt
The Marginal Cost Controversy in Intellectual Property John F Duffyt In 1938, Harold Hotelling formally advanced the position that "the optimum of the general welfare corresponds to the sale of everything at marginal cost."' To reach this optimum, Hotelling argued, general gov- ernment revenues should "be applied to cover the fixed costs of electric power plants, waterworks, railroad, and other industries in which the fixed costs are large, so as to reduce to the level of marginal cost the prices charged for the services and products of these industries."2 Other major economists of the day subsequently endorsed Hotelling's view' and, in the late 1930s and early 1940s, it "aroused considerable interest and [had] al- ready found its way into some textbooks on public utility economics."' In his 1946 article, The MarginalCost Controversy,Ronald Coase set forth a detailed rejoinder to the Hotelling thesis, concluding that the social subsidies proposed by Hotelling "would bring about a maldistribu- tion of the factors of production, a maldistribution of income and proba- bly a loss similar to that which the scheme was designed to avoid."' The article, which Richard Posner would later hail as Coase's "most impor- tant" contribution to the field of public utility pricing,6 was part of a wave of literature debating the merits of the Hotelling proposal.' Yet the very success of the critique by Coase and others has led to the entire contro- t Professor of Law, George Washington University Law School. The author thanks Michael Abramowicz. Richard Hynes, Eric Kades. Doug Lichtman, Chip Lupu, Alan Meese, Richard Pierce, Anne Sprightley Ryan, and Joshua Schwartz for comments on earlier drafts. -
Market Failure Guide
Market failure guide A guide to categorising market failures for government policy development and evaluation industry.nsw.gov.au Published by NSW Department of Industry PUB17/509 Market failure guide—A guide to categorising market failures for government policy development and evaluation An external academic review of this guide was undertaken by prominent economists in November 2016 This guide is consistent with ‘NSW Treasury (2017) NSW Government Guide to Cost-Benefit Analysis, TPP 17-03, Policy and Guidelines Paper’ First published December 2017 More information Program Evaluation Unit [email protected] www.industry.nsw.gov.au © State of New South Wales through Department of Industry, 2017. This publication is copyright. You may download, display, print and reproduce this material provided that the wording is reproduced exactly, the source is acknowledged, and the copyright, update address and disclaimer notice are retained. To copy, adapt, publish, distribute or commercialise any of this publication you will need to seek permission from the Department of Industry. Disclaimer: The information contained in this publication is based on knowledge and understanding at the time of writing July 2017. However, because of advances in knowledge, users are reminded of the need to ensure that the information upon which they rely is up to date and to check the currency of the information with the appropriate officer of the Department of Industry or the user’s independent advisor. Market failure guide Contents Executive summary -
Investment Characteristics of Natural Monopoly Companies
Investment Characteristics of Natural Monopoly Companies Škapa Stanislav Abstract This paper explores the possibilities of investment by private investors in natural monopoly companies. The paper analyzes the broad issue of risk measurement with focus on downside risk measurement principle. The main scientific aim is to adopt a more sophisticated and theo- retically advanced statistical technique and apply them to the findings. The preferred method used for the estimation of selected characteristics and ratios was the robust statistical methods and a bootstrap method. Key words: natural monopoly, investor, investment, downside risk 1. INTRODUCTION Natural monopoly companies lead to a variety of economic performance problems: excessive prices, production inefficiencies, costly duplication of facilities, poor service quality and they have potentially undesirable distributional impacts. In the eyes of consumers, it is the high prices and poor service quality that they most probably perceive. However, the question that arises is: what brings the investment into the natural monopoly company to investors? 2. THEORETICAL SOLUTIONS 2.1 Natural monopoly Economists have been analyzing natural monopolies for more than 150 year. Sharkey (1982) provides an overview of the intellectual history of economic analysis of natural monopolies and he concludes that John Stuart Mill was the first to speak of natural monopolies in 1848. One of the main questions is how a natural monopoly should be defined. There are some characteristics which should help to understand what a natural monopoly mean. According Thomas Farrer (1902, referenced by Sharkey, 1982) a natural monopoly is associated with supply and demand of characteristics that include: the product or supplied service must be essential the products must be non-storable the supplier must have a favourable production location. -
Regulation Policies Concerning Natural Monopolies in Developing and Transition Economies
ST/ESA/1999/DP.8 DESA Discussion Paper No. 8 Regulation policies concerning natural monopolies in developing and transition economies S. Ran Kim and A. Horn March 1999 United Nations DESA Discussion Paper Series DESA Discussion Papers are preliminary documents circulated in a limited number of copies and posted on the DESA web site http://www.un.org/esa/papers.htm to stimulate discussion and critical comment. This paper has not been formally edited and the designations and terminology used do not imply the expression of any opinion whatsoever on the part of the United Nations Secretariat. Citations should refer to a “Discussion Paper of the United Nations Department of Economic and Social Affairs.” S. Ran Kim and A. Horn Ms. S. Ran Kim is associate expert and Mr. A. Horn is Deputy Director of the Division for Public Economics and Public Administration, United Nations Department of Economic and Social Affairs, New York. We are very much indebted to valuable comments and suggestions from Mr. Tony Bennett. Comments should be addressed to the authors, c/o Division for Public Economics and Public Administration, Rm. DC1-900, United Nations, New York, N.Y. 10017, or by e-mail to [email protected]. Additional copies of the paper are available from the same address. Authorized for distribution by: Guido Bertucci Director Division for Public Economics and Public Administration Room DC1-928 United Nations New York, NY 10017 Phone: (212) 963-5859/Fax: (212) 963-9681 Email: [email protected] United Nations Department of Economic and Social Affairs Abstract Network industries are often organized as vertically integrated public monopolies. -
Imperfect Competition: Monopoly
Imperfect Competition: Monopoly New Topic: Monopoly Q: What is a monopoly? A monopoly is a firm that faces a downward sloping demand, and has a choice about what price to charge – an increase in price doesn’t send most or all of the customers away to rivals. A Monopolistic Market consists of a single seller facing many buyers. Monopoly Q: What are examples of monopolies? There is one producer of aircraft carriers, but there few pure monopolies in the world - US postal mail faces competition from Fed-ex - Microsoft faces competition from Apple or Linux - Google faces competition from Yahoo and Bing - Facebook faces competition from Twitter, IG, Google+ But many firms have some market power- can increase prices above marginal costs for a long period of time, without driving away consumers. Monopoly’s problem 3 Example: A monopolist faces demand given by p(q) 12 q There are no variable costs and all fixed costs are sunk. How many units should the monopoly produce and what price should it charge? By increasing quantity from 2 units to 5 units, the monopolist reduces the price from $10 to $7. The revenue gained is area III, the revenue lost is area I. The slope of the demand curve determines the optimal quantity and price. Monopoly’s problem 4 The monopoly faces a downward sloping demand curve and chooses both prices and quantity to maximize profits. We let the monopoly choose quantity q and the demand determine the price p(q) because it is more convenient. TR(q) p(q) MR [ p(q)q] q p(q) q q q • The monopoly’s chooses q to maximize profit: max (q) TR(q) TC(q) p(q)q TC(q) q The FONC gives: Marginal revenue 5 TR(q) p(q) The marginal revenue MR(q) p(q) q q q p Key property: The marginal revenue is below the demand curve: MR(q) p(q) Example: demand is p(q) =12-q. -
3. Labor Demand 3A. Labor Demand Model 3B. Short-Run Labor Demand 3B. Short-Run (Cont.)
3. Labor Demand 3A. Labor Demand Model E151A: C.Cameron n What happens when wage changes? 1. Firms maximize profit (rev - cost). In short-run? Implies produce where marginal profit = zero. In long-run? Maintained assumption throughout course. n What happens if markets are not 2. Two homogeneous factors of competitive due to monopoly or production: labor and capital. monopsony? Q = f(K, L) (Relaxed later) n What is effect of payroll tax? a. Short-run (capital is fixed) b. Long-run (capital may vary) 3A. Model (cont.) 3A. Model (cont.) 3. Price of labor = hourly wage rate. 4. Firms are price-takers in input and output markets. Implies no fringe benefits and no distinction Then marginal cost equals price between increasing labor by increasing the and marginal revenue equals price. number of workers and increasing labor by having current workers work more. Relax to allow: Monopoly: Price-maker in output good market Relax this assumption in ch. 5. Monopsony: Price-maker in input good market 3B. Short-Run (cont.) 3B. Short-Run Labor Demand n Price-taker in labor market: n MRP = Marginal Revenue Product of L L Then always MEL = w = Increase in Revenue due to So hire until MRPL = w one unit increase in Labor So MRPL curve is labor demand curve. = MR x P (P is price) n Price-taker in output market n ME = Marginal Revenue Product of L L Then always MRPL = MPLxP = Increase in Expenses due to n So in competitive markets hire until one unit increase in Labor MPLxP = w or MPL= w/P n L L Profit-maximizer hires until MRPL = MEL n MPL slopes down Þ DL slopes down 1 MRPL IS LABOR DEMAND CURVE 3C. -
Principles of Microeconomics
PRINCIPLES OF MICROECONOMICS A. Competition The basic motivation to produce in a market economy is the expectation of income, which will generate profits. • The returns to the efforts of a business - the difference between its total revenues and its total costs - are profits. Thus, questions of revenues and costs are key in an analysis of the profit motive. • Other motivations include nonprofit incentives such as social status, the need to feel important, the desire for recognition, and the retaining of one's job. Economists' calculations of profits are different from those used by businesses in their accounting systems. Economic profit = total revenue - total economic cost • Total economic cost includes the value of all inputs used in production. • Normal profit is an economic cost since it occurs when economic profit is zero. It represents the opportunity cost of labor and capital contributed to the production process by the producer. • Accounting profits are computed only on the basis of explicit costs, including labor and capital. Since they do not take "normal profits" into consideration, they overstate true profits. Economic profits reward entrepreneurship. They are a payment to discovering new and better methods of production, taking above-average risks, and producing something that society desires. The ability of each firm to generate profits is limited by the structure of the industry in which the firm is engaged. The firms in a competitive market are price takers. • None has any market power - the ability to control the market price of the product it sells. • A firm's individual supply curve is a very small - and inconsequential - part of market supply. -
Regulation, Market Structure and Performance in Telecommunications
OECD Economic Studies No. 32, 2001/I REGULATION, MARKET STRUCTURE AND PERFORMANCE IN TELECOMMUNICATIONS By Olivier Boylaud and Giuseppe Nicoletti TABLE OF CONTENTS Introduction ................................................................................................................................. 100 Regulation and market structure in telecommunications: a cross-country perspective ... 102 Past trends in regulatory reform............................................................................................ 103 Summarising regulatory reform for empirical analysis ....................................................... 111 Evaluating the effects of regulatory reform on performance in telecommunications........ 117 The empirical approach taken here...................................................................................... 119 The performance data ............................................................................................................122 Empirical results...................................................................................................................... 124 Conclusions.................................................................................................................................. 133 Annex. Panel Data Estimation Techniques ......................................................................... 139 Bibliography ................................................................................................................................ 141 The authors wish