Flashcards in Chapter 1: monopoly and Price discrimination Deck (7)
Additional Sources of a DW loss
Monopolistic enterprises characterised by stodgy management and relaxed working conditions.
Nickel (1996) - Lack of competition induces a lower rate of factor productivity growth.
-However... Eos + trickle down.
Incentives to Innovate
Ken arrow: For a perfectly competitive firm, innovation creates a new profit opportunity eh nihilo - "out of nothing"
...While a monopolist merely replaces its existing profit with a larger one. The "replacement effect"
-Monopolistic firm has less reason to innovate.
Gilbert and Newberry
What if firms know that if they don't innovate, somebody else will?
-Incentives of PC firm stay the same.
-But Monopolists would have much more to lose. Therefore the monopoly will spend more than a PC firm to secure the innovation,
Large firms more likely to support innovation.
-Better at dealing with:
-Indivisibility (Large R+D projects impossible to break down)
-Uncertainty (Large R+D required to reduce risk)
Able to market, finance and exploit their innovation more effectively.
Regulating a Natural monopoly
-Competition Policy (US: Antitrust policy) - Set of polices and laws which ensure that competition in the market place is not restricted in a way that is detrimental to ec. welfare.
-Limited or restricted competition may be tolerated if in the interest of society.
-Price regulation - Upper bound restriction on price - Price ceiling.
Rate of return regulation (USA)
ROR= (Total reveneue - total cost) / Capital Employed
Problem: Little incentives to reduce cost, incentives to over invest