Econ / Monopoly Question

[ojc02]

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It may be the case that one firm can have lower costs than many due to economies of scale. There are two cases with these low costs:

-They will pass their low costs on to consumers. In this case the consumers are served best by having a monopoly and I don't see the problem.

-They will use their "monopoly" position to attempt to charge exorbitant prices, in which case a new firm can enter the market and compete, with costs higher than firm A's but consumer costs lower than A's

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But what if they charge the monopoly price and then as soon as a competitor enters they drop the price down to just below the average cost of the competitor (while still making a profit for them)? When they do this they are again taking advantage of their lower average cost due to the economy of scale.

Incidentally, I have no problem with monopolies existing (so long as they're not coercive) or charging whatever price they see fit. If they are competing that effectively then they deserve to be able to charge whatever price they like. Ultimately, if they set their price too high, their marginal profit will be negative and they'll lose out. I am not as concerned with the dead weight loss as many seem to be. It would just seem to fit the empirical data to say that natural monopolies are seriously unlikely and unstable.

[Felz]

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How is a price higher than the second-best solution not a problem?

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Well you are the one who seems to think it is, do elaborate.

What do you mean by "second best solution"?

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First-Best-Solution --> Price = Marginal Cost --> Not Feasible due to negative profits

Second-Best-Solution --> Price = Average Cost --> Maximizes Overall Welfare

Price higher than that creates the so called dead-weight-loss of monopoly pricing hence the argument for government regulation

[Felz]

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I am not as concerned with the dead weight loss as many seem to be. It would just seem to fit the empirical data to say that natural monopolies are seriously unlikely and unstable.

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There's no reason not to be concerned with dead weight loss in a theoretical world. For your contestable markets argument only truely exists in a theoretical world as well.

Now empirically that's another problem entirely.

[TomCollins]

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How is a price higher than the second-best solution not a problem?

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Well you are the one who seems to think it is, do elaborate.

What do you mean by "second best solution"?

[/ QUOTE ]

First-Best-Solution --> Price = Marginal Cost --> Not Feasible due to negative profits

Second-Best-Solution --> Price = Average Cost --> Maximizes Overall Welfare

Price higher than that creates the so called dead-weight-loss of monopoly pricing hence the argument for government regulation

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I'm not sure if English isn't your first language, but I have no idea what you are talking about with "solutions". What alternatives are you even comparing? Where did marginal or average cost get into the equation?

[pvn]

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How is a price higher than the second-best solution not a problem?

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Well you are the one who seems to think it is, do elaborate.

What do you mean by "second best solution"?

[/ QUOTE ]

First-Best-Solution --> Price = Marginal Cost --> Not Feasible due to negative profits

Second-Best-Solution --> Price = Average Cost --> Maximizes Overall Welfare

Price higher than that creates the so called dead-weight-loss of monopoly pricing hence the argument for government regulation

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I'm not sure if English isn't your first language, but I have no idea what you are talking about with "solutions". What alternatives are you even comparing? Where did marginal or average cost get into the equation?

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I'm with him. I have no idea what you're talking about.

How do you measure "overall welfare"?

When you say "best", whose perspective are you considering? Best for person A is often not best for person B.

[Felz]

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How do you measure "overall welfare"?

When you say "best", whose perspective are you considering? Best for person A is often not best for person B.

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Do you know what the graph in OP's original post shows. Do you know what defines a natural monopoly? Do you know what dead-weight-loss means in this context. Do you know welfare economics?

[TomCollins]

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How do you measure "overall welfare"?

When you say "best", whose perspective are you considering? Best for person A is often not best for person B.

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Do you know what the graph in OP's original post shows. Do you know what defines a natural monopoly? Do you know what dead-weight-loss means in this context. Do you know welfare economics?

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Why don't you just clarify your post for the 99% of people who are not econ majors. It shouldn't be too hard for you.

Edit: I looked up the terminology. I still fail to see why this is a problem. Please explain.

[ojc02]

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I am not as concerned with the dead weight loss as many seem to be. It would just seem to fit the empirical data to say that natural monopolies are seriously unlikely and unstable.

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There's no reason not to be concerned with dead weight loss in a theoretical world. For your contestable markets argument only truely exists in a theoretical world as well.

Now empirically that's another problem entirely.

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Yeah, I'm mostly not concerned about it for political / philosophical reasons. However, when the monopolist makes money, they don't just burn it, they are going to spend or invest it so it finds its way back into the economy.

[ojc02]

In this picture the monopolist maximizes profit by setting marginal revenue equal to marginal cost. This means the area of the gray rectangle represents the monopolists profits. Under perfect competition price would be equal to marginal cost and the profit made by the firms would be the area under the marginal cost line (without the little triangle on the right). The dead weight loss is the red triangle and represents the value lost by the consumer if there is a monopoly as opposed to perfect competition.

The automatic reaction of most economists seems to be that they are upset about dead weight loss. I don't see the problem though. Why should we favor one side of the trade over the other?

[WillMagic]

Yeah...so this occurs naturally...how?

I mean, I can see how this happens if, say, government were to forcibly prevent people from entering the market, but absent that, the "monopolist" has to fear competition even if he currently has no competitors.