When technical conditions make a monopoly the natural outcome of competitive market forces, there are only three alternatives that seem available. An outward shift in the demand curve will allow the firm to sell more output at the price that it is. Wolak from the new palgrave dictionary of economics, second edition, 2008 edited by steven n. Posner a firm that is the only seller of a product or service having no close substitutes is said to enjoy a monopoly1 monopoly is an important concept to this article but even more important is the related but somewhat less. This contrasts with a monopsony which relates to a single entitys control of a market to purchase a good or service, and with oligopoly which consists of a few sellers dominating a market. It says monopoly power can arise naturally out of the market simply by firms becoming the only firm in an industry. In the following, we will first treat the monopoly price regulation problem in a. No national natural monopoly in local telecoms no natural monopoly in equipment manufacture. Economic analysis of natural monopoly has focused on several questions which. It says the smaller the number of firms in an industry, and the larger those firms are, the more monopoly power that exists in that industry. It wasnt until the 1970s that the idea of deregulation came into play, with the passage of the public utilities regulatory policies act.
The conventional economic rationale for why we regulate natural monopolies is inadequate. Berg distinguished service professor director, public utility research center university of florida fundamental principles three decades ago, the energy, telecommunications, and water industries were viewed as natural monopolies. Kahn presided over the deregulation of the airlines and his book, published earlier in that decade, presented the first comprehensive integration of the economic theory and institutional practice of economic regulation. The royal mail used to have a statutory monopoly on delivering household mail. Monopoly price and output for a monopolist economics. Electric utilities, deregulation and restructuring of u. Since a monopoly faces no significant competition, it can charge any price it wishes. For many newly privatised industries, such as water, electricity and gas, the government created regulatory bodies such as. By anti monopoly laws and policies to prevent unfair price discrimination amongst different consumers peak load pricing. Stigler, the economists and the problem of monopoly, university of chicago law occasional paper, no. Microsoft and windows, debeers and diamonds, your local natural gas. Monopoly and public policy dealing with natural monopoly 14 monopoly and public policy dealing with natural monopoly, cont. A wealth of academic literature subsequently emerged. This typically happens when fixed costs are large relative to variable costs.
Competition in telecommunications and economic growth. Joskow1 1 department of economics, massachusetts institute of technology, cambridge, ma, usa. Monopoly a monopoly is a firm who is the sole seller of its product, and where there are no close substitutes. While a monopoly, by definition, refers to a single firm, in practice the term is often used to describe a market in which one firm merely has a very high market share. Legal monopoly definition, rationale and practical example. An unregulated monopoly has market power and can influence prices.
Pdf once models of monopoly behaviour have been outlined and explored in this chapter, the discussion considers government regulation of monopolies. This section includes a discussion of ramseyboiteux pricing, twopart tariffs, more general models. In this article i explain the history and economics of restaurant development, both in eighteenthcentury paris and in thirteenthcentury china. The case for regulated monopoly in the electric grid electricity is the lifeblood of modern society. An industry with a one firm concentration ratio of 1 must be a monopoly. Regulation of natural monopolies by 05008 april 2005 paul. A monopoly is an enterprise that is the only seller of a good or service. It acts in the interest of consumers by setting prices at an affordable range for the general public. A legal monopoly is used to describe a firm that receives a government mandate to operate as a monopoly. By antimonopoly laws and policies to prevent unfair price discrimination amongst different consumers peak load pricing. The study of publicpolicy approaches to problems in industrial organization was once limited almost exclusively to antitrust policy and the regulation of a few industries with natural monopoly characteristics. Waterson 1988 notes, a governmentowned or regulated monopoly may better ensure that all customers have access to these services at reasonable prices.
Monopoly econlib the library of economics and liberty. Figure 1 illustrates the case of natural monopoly, with a market demand curve that cuts through the downwardsloping portion of the average cost curve. Technological progress technological developments have been the drive behind the transformation of certain natural monopoly markets to more competitive outcomes. Required to serve all customers, file tariffs for new services and limited price discrimination. The economic concept of monopoly focuses on the number and size of firms in an industry. Regulation policies concerning natural monopolies in developing. So what then is the appropriate competition policy for a natural monopoly. Posner a firm that is the only seller of a product or service having no close substitutes is said to enjoy a monopoly1 monopoly is an important concept to this article but even more important is the related but somewhat less familiar concept of natural monopoly. Whether policymakers were correct in their original assessment that telecommunications was a natural monopoly i.
A natural monopoly exists in an industry where a single firm can produce output such as to supply the market at a lower per unitcost than can two or more firms. Deregulated electricity markets traditionally, regulated electricity markets existed across the united states, restricting customer choice. Salient features of the regulated monopoly mode l and the scenario analysed are as follows. What the forms of economic regulation have in common is an objective function intended to guide intertemporal cost growth at some lower rate than the unregulated firm.
A significant amount of the material in this chapter has been drawn from my lectures on the regulation of natural. In both types of governmentinitiated monopoly competition is kept out of the market through laws, regulations, and other mechanisms of government enforcement. Economic theory says nothing of how to treat stranded assets of regulated monopoly utilities rose, 1996. These regulatory practices were theoretically underpinned by the market failure argument, which provided the central economic argument for state. This is changing fast as the industry seen fresh competition. A natural monopoly poses a difficult challenge for competition policy, because the structure of costs and demand seems to make competition unlikely or costly. Just being a monopoly need not make an enterprise more profitable than. A working monopoly is any firm with greater than 25% of the industries total sales. By regulation of conditions of monopoly, as in case of natural and regulated monopolies mc pricing.
Natural monopolies are associated to market efficiencies, which call for regulation. This regulated monopolist does not benefit from an outward shift in the demand curve since it cant raise its price in response to the higher demand. The case for regulated monopoly in the electric grid. Regulation extremely slow to adapt to change in technology and demand once put in place. For monopoly segments, batlle and ocana 20 observed many forms of economic regulation appeared to exist, but experience has narrowed this set down to just a few options.
Natural monopoly and its regulation university of chicago. Statement 2 can be changed to be true in the following manner. In a monopoly market, factors like government license, ownership of resources, and patent and high starting cost make an entity a single seller of goods. A natural monopoly arises when average costs are declining over the range of production that satisfies market demand. In his lengthy new introduction to this edition kahn surveys and analyzes the deregulation revolution. As chairman of the civil aeronautics board in the late 1970s, alfred e.
Rey, 2008, notes on the economics of termination charges. During the past twentyfive years the amount of research on the economics of government regulation has increased enormously. In the case of monopoly, one firm produces all of the output in a market. Points a, b, c, and f illustrate four of the main choices for regulation. Microeconomics microeconomics c o u rs e t ex t a n d s t u d y gu i d e microeconomics, 17th edition campbell r mcconnell, university of nebraskalincoln, and stanley l brue, pacific lutheran university, 2008. Optimal price regulation for natural and legal monopolies core. A significant amount of the material in this chapter has been drawn from my lectures on the regulation of. In a monopoly market, the seller faces no competition, as he is the sole seller of goods with no close substitute. How stranded monopoly assets are dealt with is of vital importance to social welfare but is a complex area of economics for three reasons.
In the absence of government intervention, a monopoly is free to set any price it chooses and will usually set the price that yields the largest possible profit. Non regulated monopoly characterization single supplier for the entire market exclusive franchise or a natural monopoly no competitors may enter the market freedom to set the selling price not a given input now strategy of firm. Microeconomics assignment help, example of regulated monopoly, as there are natural monopoly market situations it is in the public interestto permit monopolies, but traditionally in the united states they are regulated with respect to price. Consider a monopolist that is regulated under price cap regulation and prices at the cap. The restaurant as it is known today had its origin in the taverns, inns, traiteurs cookshops, and boarding houses of an earlier day. Keywords natural monopoly, regulation, subadditivity of costs. Monopoly a monopoly is a firm who is the sole seller of. Regulatory economics is the economics of regulation. In practice, there are many markets where businesses enjoy a degree of monopoly power even if they do not.
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