What’s So Bad About Monopolies? & What Can We Do About It?

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
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
 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
 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-
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.
 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
 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
How Do We “Fix” Monopolies
AT&T Before and
After the Break-up
After the Break Up
Colbert on the AT&T Break-Up
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
Economies of scale as a cause of monopoly
Average total cost
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
Natural Monopoly – Avg Cost Decrease with Increasing
Size/Scale of the Firm – Divestiture Raises Avg Cost
ATC in short
run with
small factory
ATC in short
run with
medium factory
ATC in short
run with
large factory
ATC in long run
of scale
Constant returns to scale
of scale
Quantity of Cars per Day
Because fixed costs are variable in the long run, the average-total-cost curve in the short run
differs from the average-total-cost curve in the long run.
AT&T – A Short History
 Alexander Graham Bell patented the telephone in
 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).
The New Market - Wireless
Wireless Customers- by Carrier
And Then There is Comcast
& Time-Warner – Cable Companies
And Then There is Comcast
& Time-Warner
Monopolies – Antitrust Law
 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
Public Policy Toward Monopolies
 Regulation
 Regulate the behavior of monopolists
Price – don’t allow P > MC
 Issue – Firms have all of the data on their prices – may not
disclose accurate information
 Common in case of natural monopolies
 Marginal-cost pricing
May be less than ATC
No incentive to reduce costs