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OU ECON 1123 - Regulating Monopoly

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ECON 1123 1st Edition Lecture 19 Outline From Previous Lecture (Lecture 18)I. Monopoly InefficiencyII. Monopoly Characteristics RevisitedOutline Lecture 19I. Price DiscriminationII. Regulating the Natural MonopolistIII. How do you tell monopoly power?Lecture 19 NotesI. Price DiscriminationPrice Discrimination- charging different customers different prices for the same productThree types of price discrimination:1. First degree (perfect) price discrimination- charging each customer the maximum priced each is willing to pay. They will do this until the demand meets the ATC schedule because if they do that past that point on the demand schedule they will incur loss.2. Second degree Price discrimination- Charging different customers based on the quantities purchased. This is called “tiered pricing”3. Third degree price discrimination- charging different groups of customers different prices. (example: airlines will charge business people more than vacationers because business people have more inelastic demand that says that they really need to be somewhere.II. Regulating the Natural MonopolistNatural monopoly = large economies of scale (declining ATC) mean the efficient scale of operations is roughly equal to market demand (electrical company, water company)Marginal Cost pricing rule- Regulations force the natural monopoly (public utility) to charge a price that equals marginal costAverage Cost Pricing- Regulators require the natural monopoly to charge a price = to average total costsAt Price of average total costs the utility earns normal accounting profitsThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Rate of return regulation- Regulators allow the monopoly to earn normal accounting profits by estimating or calculating a reasonable return on invested capitalProblem: which costs and capital investments should be included?Price Caps- regulators only allow the monopoly (utility) to charge certain “Capped” maximum pricesCase study: California energy crisis 2000-2001Wholesale prices for the company went up 800% but the electric company sells in the retail market at capped prices (trying to make electricity available for everyone) The company went bankrupt and there were shortages of power in San Francisco.III. How do you measure monopoly power?a) Concentration ratiob) Herfendal- Hirschman Index (HHI)Concentration ration- equal to the share of industry sales accounted for by the largest firms in the industry usually largest 4 or largest 8.However, sometimes you cannot just rely on the CR, so you use HHI.Herfendal-Hirschman index- A way of measuring industry concentration equalto the sum of the square of market shares of all firms in the


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