OU ECON 1123 - Regulations on Monopoly and Monopolistic Competition

ECON 1123 1st Edition Lecture 20 Outline From Previous Lecture (Lecture 19)I. Price DiscriminationII. Regulating the Natural MonopolistIII. How do you tell monopoly power?Outline Lecture 20I. Antitrust PolicyII. Measuring the Extent of monopoly powerIII. Contestable MarketsIV. Monopolistic CompetitionLecture 20 NotesI. Antitrust PolicyAntitrust Policy- laws designed with intention to maintain competition and prevent monopolies from developing Examples:Sherman Anti-Trust Act (1890)- conspiracies in the restraint of trade and attempt to monopolize are illegalClayton Act (1914)- Makes price discrimination illegal IF it lessens competitionFederal Trade Commission Act (1914)- Unfair or deceptive commercial practices are illegalII. Measuring the Extent of monopoly powerStigler: “All products or enterprises with large long run elasticities of demand should be combined in a single market”Cross elasticity of demand= (% change in Qdemanded of X)/(% change in Price Y)You look at the relationship between these and if they are both increasing then they are substituesHerfendal-Hirschman Index- Way of measuring industrial concentration, equal to the sum of the squares of market shares of all firms in the industry.HHI= (S1)^2 + (S2)^2+….(SN)^2These 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.Where S1, S2, SN = percentage market share (% total industry sales of each firm in the industry)This takes away the errors that you can get using only concentration ratioHHI ranges from approximately 0 (a very large number of firms with very small market shares like pure competition) to 10,000 which would be pure monopoly.1992 FTC Guidelines:If HHI<1,000 unconcentrated1000<HHI<1800 moderately concentratedHHI>1800 Highly concentrated Mergers resulting in HHI>1000 (approved)Mergers resulting in HHI 1000<HHI<1800 (closely evaluated)Criteria for evaluation: if HHI rises by 100 points them typically its disapprovedMergers resulting in HHI> 1800 (typically challenged and disapproved if HHI goes up by 50)III. Contestable MarketsMarkets that may appear to be monopolistic, but entry and exit costs that the threat of competition keeps prices lower. (Closer to competitive level)Implication- perfectly contestable markets deliver the theoretical benefits of pure competition without a large number of firms Assymetric Information- may be a barrier to entry (incumbents have more knowledge than new entrants)Regulations forced british telecom to allow broadband operators to use their infrastructure. *We get the benefit of highly competitive industry with just a few firms in itMethods of Regulation:1. Public Ownership- the monopoly will be publicly owned and operated to achieve competitive prices and outputs2. Competitive Bidding: stipulating proposed conditions of supply become the conditions of license3. Private Ownership with price regulation-a. marginal cost pricing (pure competition-> price=MCb. P=MC with P<ATC -> Econ Lossesc. Fair rate of return- regulated monopoly is allowed to earn a “normal” accounting profit achieved by setting price equal to Average total costIV. Monopolistic CompetitionCharacteristics:1. Large number of small firms. Independent of a competitors reactions to price change. 2. Entry and Exit is not costly3. Products are