OU ECON 1123 - Regulations on Monopoly and Monopolistic Competition (3 pages)

ECON 1123 Edition 1st Lecture 20 Outline From Previous Lecture Lecture 19 I Price Discrimination II Regulating the Natural Monopolist III How do you tell monopoly power Outline Lecture 20 I Antitrust Policy II Measuring the Extent of monopoly power III Contestable Markets IV Monopolistic Competition Lecture 20 Notes I Antitrust Policy Antitrust 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 illegal Clayton Act 1914 Makes price discrimination illegal IF it lessens competition Federal Trade Commission Act 1914 Unfair or deceptive commercial practices are illegal II Measuring the Extent of monopoly power Stigler 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 substitues Herfendal 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 2 These 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 ratio HHI 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 unconcentrated 1000 HHI 1800 moderately concentrated HHI 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 disapproved Mergers resulting in HHI 1800 typically challenged and disapproved if HHI goes up by 50 III Contestable Markets Markets 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 it Methods of Regulation 1 Public Ownership the monopoly will be publicly owned and operated to achieve competitive prices and outputs 2 Competitive Bidding stipulating proposed conditions of supply become the conditions of license 3 Private Ownership with price regulationa marginal cost pricing pure competition price MC b P MC with P ATC Econ Losses c Fair rate of return regulated monopoly is allowed to earn a normal accounting profit achieved by setting price equal to Average total cost IV Monopolistic Competition Characteristics 1 Large number of small firms Independent of a competitors reactions to price change 2 Entry and Exit is not costly 3 Products are differentiated