WHEN THE GOVERNMENT PLAYS IN THE MARKETNatural Monopolies and Antitrust Actions

Review Markets

What about when a monopoly means LOWER costs?

Natural Monopoly• One firm

• Cost structure such that only room for one• Very, very high fixed costs and low marginal costs

• Socially desirable (usually) product or service,• Like electricity, phone, mail delivery and….internet

• Legal barrier to entry

• Profits and prices regulated

Natural Monopoly - Examples

Natural Monopoly

Conditions

• One firm

• Public Service

• Non-differentiated

• Significant Barriers to entry

Implications

• Market Power –• No close substitutes

• Universal Provision

• Profits possible, but regulated

Problems with regulation• 1. Capture Hypothesis (2014 Nobel prize winner)

• 2. Little incentive for innovation or cost-savings

• 3. Imperfect Market Signals

Push to Privatize

Pros

• Encourages competition

• Innovation

• Quality may increase

• Lower P & Higher Q

Cons

• Some current consumers will not be served

• Prices may go up as lose regulation and lower ATC

• Replace for “the public good” with “profit motives”

• Quality may decrease

Ways to deregulate• Municipal provision

• By public employees• By contract with private firm

• Private regulated• Require price limits or rate caps• Require universal service

• Private unfettered

• Non-profit

Cable TV• Deregulated in 1984

• P went up, but Q went up too

• Cable providers added more channels and options

• Now minimal local regulation

• Privatization worked.