natural monopoloies

1. WHEN THE
GOVERNMENT PLAYS
IN THE MARKET
Natural Monopolies and Antitrust Actions

2. Review Markets

3. What about
when a
monopoly
means
LOWER
costs?

4. 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

5. Natural Monopoly - Examples

6. 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

7. Problems with regulation
• 1. Capture Hypothesis (2014 Nobel prize winner)
• 2. Little incentive for innovation or cost-savings
• 3. Imperfect Market Signals

8. 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

9. 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

10. 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.