Chapter 1: monopoly and Price discrimination Flashcards Preview

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Additional Sources of a DW loss

Monopolistic enterprises characterised by stodgy management and relaxed working conditions.

Managerial Slack

Nickel (1996) - Lack of competition induces a lower rate of factor productivity growth.

-However... Eos + trickle down.


Incentives to Innovate

Technological Progress

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,


Schumpetarian Theory

Large firms more likely to support innovation.

-Better at dealing with:
-Externalities (imitation)
-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


Price Cap Regulation (EU and UK)

RPI + K - Xfactor