WHEN THE GOVERNMENT PLAYS IN THE MARKET Natural Monopolies and Antitrust Actions
WHEN THE GOVERNMENT PLAYS IN THE MARKETNatural Monopolies and Antitrust Actions
Review Markets
What about when a monopoly means LOWER costs?
Natural Monopoly• One firm
• Cost structure such that only room for one• Very, very high fixed costs and low marginal costs
• Socially desirable (usually) product or service,• Like electricity, phone, mail delivery and….internet
• Legal barrier to entry
• Profits and prices regulated
Natural Monopoly - Examples
Natural Monopoly
Conditions
• One firm
• Public Service
• Non-differentiated
• Significant Barriers to entry
Implications
• Market Power –• No close substitutes
• Universal Provision
• Profits possible, but regulated
Problems with regulation• 1. Capture Hypothesis (2014 Nobel prize winner)
• 2. Little incentive for innovation or cost-savings
• 3. Imperfect Market Signals
Push to Privatize
Pros
• Encourages competition
• Innovation
• Quality may increase
• Lower P & Higher Q
Cons
• Some current consumers will not be served
• Prices may go up as lose regulation and lower ATC
• Replace for “the public good” with “profit motives”
• Quality may decrease
Ways to deregulate• Municipal provision
• By public employees• By contract with private firm
• Private regulated• Require price limits or rate caps• Require universal service
• Private unfettered
• Non-profit
Cable TV• Deregulated in 1984
• P went up, but Q went up too
• Cable providers added more channels and options
• Now minimal local regulation
• Privatization worked.