Econ / Monopoly Question

[WillMagic]

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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.

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If you have become so good at making something, that you can mark up the price so much, no one else dares enter the market. They enter, you make it unprofitable for them to do so. So no one is stupid enough to enter.

If you don't think this happens naturally, you are wrong. I currently work in an industry where this is the case. We have virtually no competition and insane markup. No one can come close to making these goods as cheap as we can.

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What industry is this, TC?

[ojc02]

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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

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I don't think this is quite right. When price = marginal cost, opportunity costs are included so accounting profit is still positive but economic profit is zero by definition.

I think price being equal to marginal cost is not possible because perfect competition never occurs, it's a theoretical limit that is never reachable.

[ojc02]

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Ah ok, I only asked because it seemed like you could draw a dead-weight-loss equivalent in the labor market caused by the minimum wage.

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Indeed the same ideas apply.

Just to make that clear (nothing to do with minimum wages), the tragedy with natural monopolies is that it's efficient to have a monopoly - due to decreasing average cost that are higher than the marginal cost - as it can and eventually will produce at minimum average cost. Only problem is how to make sure the monopolist in the end doesn't charge the Cournot price resulting in the well known dead weight loss.

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So while I accept that natural monopolies are possible in the short run, I don't think they can possibly survive long term due to advances in technology etc. Also, it's only a few industries that can possibly produce a natural monopoly in the short run. That's why I don't think there needs to be any effort to prevent them

Ultimately, even in the most commoditized industries, no two companies are identical and those differences mean that economic profits will be made. Trying to prevent economic profits just isn't feasible and leads to situations where companies are afraid of succeeding because they fear the nightmare of getting accused of an anti-trust violation. You get situations where GM's policy is to not make their cars so good or inexpensive that they achieve greater than 45% market share.

Edit: Woah! My 500th post!! [img]/images/graemlins/smile.gif[/img]

[NeBlis]

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We have virtually no competition and insane markup. No one can come close to making these goods as cheap as we can.




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What industry is this, TC?

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this one fits

[Felz]

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So while I accept that natural monopolies are possible in the short run, I don't think they can possibly survive long term due to advances in technology etc. Also, it's only a few industries that can possibly produce a natural monopoly in the short run. That's why I don't think there needs to be any effort to prevent them

Ultimately, even in the most commoditized industries, no two companies are identical and those differences mean that economic profits will be made. Trying to prevent economic profits just isn't feasible and leads to situations where companies are afraid of succeeding because they fear the nightmare of getting accused of an anti-trust violation. You get situations where GM's policy is to not make their cars so good or inexpensive that they achieve greater than 45% market share.

Edit: Woah! My 500th post!! [img]/images/graemlins/smile.gif[/img]

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Well, as Keynes once said: "In the long run we're all dead." [img]/images/graemlins/smile.gif[/img]
Anyways, you turn that into an empirical question. Generally natural monopolies don't necessary call for government regulation if theyre contestable (which they probably won't be in the short but maybe in the long run) and most importantly if there's substitutes which reduce the monopolist's market power.

I think you're misunderstanding this somewhat as there's noone who'd want to prevent them but rather regulate them. They'd still be monopolies but they'd be price regulated. Of course this raises the issue of market failure versus government failure as regulated industries usually aren't overly efficient due to certain negative incentives (see for instance Averch-Johnson-Effect).

Lately there's been a massive trend towards deregulating these industries (at least in Europe) especially network industries.