What’s So Bad About Monopolies?
&
What Can We Do About It?
What’s So Bad About Monopolies
 Martin Shkreli In September 2015, Shkreli received
widespread criticism when Turing obtained the
manufacturing license for the antiparasitic drug
Daraprim and raised its price by 5,556 percent (from
US$13.50 to US$750 per tablet) leading him to be
referred to by media as the "most hated man in
America".[4]
What’s So Bad About Monopolies?
 Compared to Perfect Competition
 Higher Price for Fewer Goods


Don’t face competition – no substitutes
Do have to take into account that their production level
(quantity supplied) affects the price customers are willing to
pay
 Choose profit max’ing output to max profits
 Choose Q* such that MC(Q*) = MR(Q*)

Remember for monopolist P > MR
What’s So Bad About Monopolies?
 Compared to Perfect Competition
 Higher Price for Fewer Goods
 Economic Considerations
 P > MC


Consumer’s value (MV) of Q* > Cost (MC) of resources used
 Thus -> Deadweight Loss (Economic Inefficiency)
Allocatively Inefficient
 Q* not produced at lowest cost (ATC > min(ATC))
 Productively Inefficient
 Little Incentive to Adopt New Technology
 No competition -> no incentive to adopt new tech & reduce cost
How Did It Happen?
 Monopoly
 Firm that is the sole seller of a product without close
substitutes
 Barriers to entry – prevent firms from entering this market
when there are + economic profits




Legal and Cost Barriers
 NBA, Medical, Patents (pharmaceutical)
Monopoly resources
 Oil, Diamonds, Professional Sports
Government regulation
 Comcast
High Cost Barriers to Enter the Market – Aerospace
Big Pharma
 Big Pharma Is America’s New Mafia
 Pharmaceutical companies have more power than ever,
and the American people are paying the price—too
often with our lives.
 http://time.com/3700497/john-oliver-last-week-
tonight-big-pharma/
Professional Sports
 At the federal level, antitrust legislation serves as one
culprit in the city-switching games played by teams.
 Pro sports leagues have been classified by government
officials as monopolies, and are therefore subject to
antitrust regulation.
 The exception to this has been Major League Baseball,
which operates under an antitrust exemption, and
indeed, baseball teams remain far less mobile than, for
example, NFL teams.
Aerospace
 Boeing and Airbus – Market Share
How Do We “Fix” Monopolies
 Lower Barriers to Entry
 Goal is to increase competition by allowing more firms
to enter the market and compete against each other
 AT&T Divestiture (1980)
 DOJ and FCC sought to introduce competition into the
local phone markets (dominated by 7 RBOCs, “bab y
bells”)
 Required AT&T/RBOCs to lease local wirelines,
switching networks, transmission satellites and local
household connections at “forward” looking economic
costs (which were below historical costs)
AT&T and the Baby Bells
Before
After
How Do We “Fix” Monopolies

AT&T Before and
After the Break-up

After the Break Up
Colbert on the AT&T Break-Up
http://www.ebaumsworld.com/video/watch
/955486/
What the FCC Missed
and Why the Mergers Happened
Why Monopolies Arise
 The production process
 A single firm can produce output at a lower cost than
can a larger number of producers
 Natural monopoly
 Arises because a single firm can supply a good or service
to an entire market

At a smaller cost than could two or more firms
 Economies of scale over the relevant range of output
16
1
Economies of scale as a cause of monopoly
Costs
Average total cost
0
Quantity of output
When a firm’s average-total-cost curve continually declines, the firm has what is called a
natural monopoly. In this case, when production is divided among more firms, each firm
produces less, and average total cost rises. As a result, a single firm can produce any given
amount at the smallest cost
17
AT&T – A Short History
 Alexander Graham Bell patented the telephone in
1876,
 formed Bell Telephone which licensed local telephone
exchanges in major US cities. AT&T was formed in 1885
 In 1913 AT&T became a regulated monopoly.
 had to connect competing local companies
 And let the Federal Communication Commission
(FCC) approve their prices and policies.
 All customers rented phones from AT&T, and no other
equipment could be attached to the network for fear of
"breaking" it.
AT&T – A Short History
 On January 1, 1984, a court forced AT&T to give up its
22 local Bell companies (Divestiture)
 This established seven Regional Bell Operating
Companies (RBOC).
 Since that time, mergers have reduced the number of
RBOCs to four: Verizon (originally Bell Atlantic and
Nynex), Qwest (Qwest Communications International
took over US West), BellSouth and SBC (originally
Southwestern Bell and Pacific Telesys).


And Then There is Comcast
& Time-Warner
And Then There is Comcast
& Time-Warner
Public Policy Toward Monopolies
 Increasing competition with antitrust laws
 Sherman Antitrust Act, 1890

Reduce the market power of trusts
 Clayton Antitrust Act, 1914


Strengthened government’s powers
Authorized private lawsuits
 Prevent mergers
 Break up companies
 Prevent companies from coordinating their activities to
make markets less competitive
25
Public Policy Toward Monopolies
 Regulation
 Regulate the behavior of monopolists

Price
 Common in case of natural monopolies
 Marginal-cost pricing


26
May be less than ATC
No incentive to reduce costs