I. Preconceptions about Monopoly
A. When most people today think about "monopoly," they think about firms gaining a dominant position in an unregulated free market
1. Standard Oil & Rockefeller
B. Problem: Might not their dominant position be due to superior efficiency? If so, what is so bad about "monopoly"?
C. Frequently overlooked: Government-created monopoly in industries that would otherwise be competitive.
1. The government might be the monopoly supplier itself.
2. Alternately, it might give a private supplier a monopoly privilege
D. Government-created monopoly is unlikely to have won its position through superior efficiency; in fact, the reverse is true.
E. After voluntary cartels fail, firms often turn to the government to enforce monopoly.
A. Monarchical monopolies
B. New Deal farm cartels (preceded by failed voluntary cartels)
1. Cotton – In 1933, government paid $100,000,000 in benefits to get farmers to plow up a quarter of the cotton crop. Gradual shift to “loans” and acreage controls.
2. Wheat – not plowed up in ’33 because of bad weather conditions, but loan & acreage program
3. Hogs – in ’33, six million baby pigs bought and slaughtered by the feds
C. CAB and ICC
1. Civil Aeronautics Board severely restricted competition in commercial airlines. It set minimum air cargo and passenger rates, keeping rates 10-20% above unregulated rates (deregulation since late ‘70s).
2. Interstate Commerce Commission severely restricted competition in inter-state trucking. It originally fixed railroad rates – generally working to keep prices up from the start. In the ‘30’s, ICC took over trucking (railroads were suffering from competition from trucks). Trucking rates regulated, and licenses required (and almost no new licenses were ever issued, so you had to buy out an existing owner). Kept prices 20-40% above market rates. (Crazy aspects – only being able to have cargo 1-way; round-about routes based on licensing)
Anecdote on intra-state trucking in
D. Nazis’ anti-chain and department store laws
1. One long-term Nazi cause was protecting mom&pop stores from department and chain stores. Once the Nazis came to power, there were numerous official and unofficial penalties imposed on them...
2. Unofficial: Boycotts by the Frauenshaft (Women’s Organization) and local Party leaders; 29 Jewish department strores burned during Kristallnacht.
3. Official: Extra Winterhilfe taxes, advertising restrictions, kept out of trade in Party paraphernalia, higher state taxes on department stores
III. The Theory of Monopoly
A. Previous models all assumed the constraints imposed on a firm by actual or potential competitors. What if competition is illegal - i.e., one firm has the sole legal privilege of producing a good?
B. Simple answer: Raise price above marginal cost (equivalent to: produce less than competitive quantity)
C. Complicated answer: set Marginal Revenue= Marginal Cost
D. Result: Monopolist earns a monopoly profit due to the illegality of competition
IV. What is Inefficient About Monopoly?
A. Allocative inefficiency - P>MC; remember "Why Taxes Are Bad"
B. Piracy and Monopoly, or Deadweight Losses vs. Transfers
1. For pirates: The Transfer is the captured loot; the Deadweight Losses include the sunken ship, goods destroyed during fighting...
2. For monopolist: The Transfer is the monopoly profit; the Deadweight Losses stem from the marginal units not produced
C. Productive inefficiency - AC above minimum
1. Simple theory of monopoly does not predict productive inefficiency. Monopolist wants to make as much profit as possible, and the lower costs are, the greater profits are.
2. However, if different potential producers have different cost curves (some are more efficient than others), then there will be productive inefficiency unless the most efficient producer also receives the monopoly privilege.
3. There may also be productive inefficiency if the monopolist's profits are regulated. Why?
A. Bidding for Monopoly
1. Imagine the government holding an auction, in which firms bid for the monopoly license. (Many monarchs used this sort of technique to raise revenue).
2. Who now gets the monopoly profits?
3. What happens to the DW loss of monopoly?
B. Lobbying for Monopoly
1. Bidding (or cash bribes) is no longer very common.
2. Lobbying - hiring lawyers, political insiders, etc. - to plead one's case is now the standard method.
3. Even though the law may ban competitive production, it rarely bans competitive lobbying. Thus, each would-be monopolist can (and does!) invest in lobbying.
C. How Competitive Lobbying Can Make Monopoly Really Inefficient
1. With competitive lobbying (i.e., zero profits for investment in lobbying), who now gets the monopoly profits?
2. What does competitive lobbying do to the DW loss of monopoly?