17/02/2006Master of Engineering and Management of Technology – 9th Edition - Microeconomics1...

17/02/2006 Master of Engineering and Management of Technology – 9th Edition - Microeconomics 1

Monopoly and RegulationMonopoly and Regulation

Filipe JanelaMiguel MartinsSónia RomãoTiago Martinho

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Definition of MonopolyDefinition of Monopoly Monopoly BehaviourMonopoly Behaviour Natural MonopoliesNatural Monopolies

CharacteristicsCharacteristics The Problem of Natural MonopolyThe Problem of Natural Monopoly

RegulationRegulation Economic Theory of RegulationEconomic Theory of Regulation Basic Problems and EffectsBasic Problems and Effects State ownership State ownership vsvs Privatisation and Regulation Privatisation and Regulation Privatization, De-regulation and Barriers to EntryPrivatization, De-regulation and Barriers to Entry

Examples of MonopoliesExamples of Monopolies

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Definition of Definition of MonopolyMonopoly

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Monopoly DefinitionMonopoly Definition

A single firm selling all the output in a marketA single firm selling all the output in a market It´s a model – it rarely exists in pure formIt´s a model – it rarely exists in pure form But many firms have some degree of But many firms have some degree of

monopoly powermonopoly power Example:Example: Can a cinema, in a local village, be Can a cinema, in a local village, be

considered as a monopoly according to these considered as a monopoly according to these definition?definition?

Depends on the alternatives. If the product (film) can be substituted for another one or not. If the local cinema has on exibition a good film and it´s the only one nearby, then a person, as long as interested, has only one place to go (Monopoly).

Definitions

Monopoly Behaviour

Natural Monopoly

Regulation

Examples

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Causes of monopoly powerCauses of monopoly power

Control of resources Control of resources (de Beers over diamonds)(de Beers over diamonds)

Economies of scale Economies of scale (software)(software)

Patent Protection Patent Protection (AZT, anti-AIDS Drug)(AZT, anti-AIDS Drug)

Government Protection Government Protection

What causes a single firm selling all the output in a market?

Definitions

Monopoly Behaviour

Natural Monopoly

Regulation

Examples

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Monopoly BehaviourMonopoly Behaviour

Definitions

Monopoly Behaviour

Natural Monopoly

Regulation

Examples

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Definitions

Monopoly Behaviour

Natural Monopoly

Regulation

Examples

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Marginal revenue = B - C

Definitions

Monopoly Behaviour

Natural Monopoly

Regulation

Examples

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Optimum where MR = MC

MR = MC = 12Q* = 6, P* = 18AC = 8Profit = (18-8)6 = 60

Maximizing ProfitExample

Definitions

Monopoly Behaviour

Natural Monopoly

Regulation

Examples

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Optimum where MR = MC

MR = MC = 12Q* = 6, P* = 18AC = 8Profit = (18-8)6 = 60

Maximizing ProfitExample

Definitions

Monopoly Behaviour

Natural Monopoly

Regulation

Examples

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• For the consumers…

The monopolist operates with prices greater than Marginal Costs prices higher and output lower than in a competitive environment consumers typically be worse

• For the firms…

•In contrast, firms will be better under monopoly, as they can manipulate the price in order to increased profits

•An economic arrangement is Pareto efficient if there is no way to make anyone better without making anyone worse, so

Consumers typically be worse

Is the monopoly Pareto Efficient?

Definitions

Monopoly Behaviour

Natural Monopoly

Regulation

Examples


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Definitions

Monopoly Behaviour

Natural Monopoly

Regulation

Examples


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•Since p > Marginal Costs Since p > Marginal Costs extra output could be sold at extra output could be sold at a price lower than the market price, but still higher than a price lower than the market price, but still higher than MC MC each side gets better each side gets better

• The monopoly is not Pareto efficient because The monopoly is not Pareto efficient because the monopolist cannot lower the price of the extra the monopolist cannot lower the price of the extra units without lowering the prices of units without lowering the prices of allall units units

Definitions

Monopoly Behaviour

Natural Monopoly

Regulation

Examples


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Measure how inefficient is a monopolyMeasure how inefficient is a monopoly

VariationsVariations of producers’ and consumers’ surpluses by imposing a of producers’ and consumers’ surpluses by imposing a perfect competition to a monopoly situationperfect competition to a monopoly situation

Definitions

Monopoly Behaviour

Natural Monopoly

Regulation

Examples


Deadweight Loss of the EconomyDeadweight Loss of the Economy

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Definitions

Monopoly Behaviour

Natural Monopoly

Regulation

Examples


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Natural Natural MonopoliesMonopolies

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Natural MonopoliesNatural Monopolies

DEFINITIONDEFINITION

A A "natural monopoly""natural monopoly" is defined in economics as an industry is defined in economics as an industry wherewhere the fixed cost of the capital goods is so high that it is not the fixed cost of the capital goods is so high that it is not profitable for a second firm to enter and compete. There is a profitable for a second firm to enter and compete. There is a "natural""natural" reason for this industry being a monopoly, namely that reason for this industry being a monopoly, namely that the economies of scale require one, rather than several, firms. the economies of scale require one, rather than several, firms. Small-scale ownership would be less efficient. Small-scale ownership would be less efficient.

Definitions

Monopoly Behaviour

Natural Monopoly

Regulation

Examples

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The existence of natural monopolies is determined by theThe existence of natural monopolies is determined by the interaction of twointeraction of two factors: factors:

1.1. TTechnologyechnology

2.2. DDimension of the market.imension of the market.

SUNK COSTSSUNK COSTS

Any good whose provision demands a very high level of initial investment Any good whose provision demands a very high level of initial investment which cannotwhich cannot be recovered will face what is called be recovered will face what is called sunk costssunk costs. .

Natural monopolies are typically utilities such as Natural monopolies are typically utilities such as tthe distribution of he distribution of electricityelectricity, , gasgas or or water supplieswater supplies, , telecommunications servicestelecommunications services, , rail rail and and air air transportstransports.. These activities These activities demand a large initial investment in the demand a large initial investment in the establishment of a network serving all theestablishment of a network serving all the potential customers. potential customers.

Definitions

Monopoly Behaviour

Natural Monopoly

Regulation

Examples

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SUNK COSTSSUNK COSTS

Sunk Costs Sunk Costs characteristicscharacteristics::

TThey cannot be recovered and demand regular maintenance activities hey cannot be recovered and demand regular maintenance activities that, to a certainthat, to a certain point, are independent of the output (fixed costs);point, are independent of the output (fixed costs);

(when the network is working(when the network is working below full capacity)below full capacity)

OOnce the network isnce the network is set up, the additional set up, the additional cost of serving a new customer cost of serving a new customer is very smallis very small when compared to the investment (sunk) cost. when compared to the investment (sunk) cost.

TThe larger the number of consumers, thehe larger the number of consumers, the lower will be the average cost of lower will be the average cost of production, since the amount of costs independentproduction, since the amount of costs independent of the quantity of the quantity produced (both sunk and fixed) is much larger than the marginal cost.produced (both sunk and fixed) is much larger than the marginal cost.

Definitions

Monopoly Behaviour

Natural Monopoly

Regulation

Examples

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TThe most advantageous way to organise a market such as thishe most advantageous way to organise a market such as this (given the (given the dimension of the demand) is the establishment of a monopoly, since the dimension of the demand) is the establishment of a monopoly, since the existenceexistence of two or more competing firms would mean the building of of two or more competing firms would mean the building of many different networks, andmany different networks, and would multiply sunk costswould multiply sunk costs

It would be very costly to build a second set of It would be very costly to build a second set of waterwater and sewerage pipes and sewerage pipes in a city. in a city. Water Water and and gasgas delivery service has a high fixed cost and a low delivery service has a high fixed cost and a low variable cost. variable cost.

ElectricityElectricity is now being deregulated, so the generators of electric power is now being deregulated, so the generators of electric power can now compete. But the infrastructure, the wires that carry the can now compete. But the infrastructure, the wires that carry the electricity, usually remain a natural monopoly, and the various companies electricity, usually remain a natural monopoly, and the various companies send their electricity through the same grid. send their electricity through the same grid.

In these cases, we have a situation where the joint supply of several different products/services can be done at a lower cost than would be the case if these products were supplied separately. The concept of scale economies is then joined by that of economies of scope.

Definitions

Monopoly Behaviour

Natural Monopoly

Regulation

Examples

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Even though monopoly is inefficient, forcing the monopolist to equate price to MC will sometimes determine negative profits. That happens whenever the demand curve intersects the MC curve beneath the AC curve.

Definitions

Monopoly Behaviour

Natural Monopoly

Regulation

Examples

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RegulationRegulation

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Economic RegulationEconomic Regulation

Theories of RegulationTheories of Regulation

Public InterestPublic Interest: responds to market failures; insure : responds to market failures; insure

competitive conditions;competitive conditions;

Capture Theory of RegulationCapture Theory of Regulation: regulation in activities : regulation in activities

which do not seem to present any need for regulation and which do not seem to present any need for regulation and

yet are subjective to extensive intervention; tend to yet are subjective to extensive intervention; tend to

substitute public interest for the private;substitute public interest for the private;

Economic Theory of RegulationEconomic Theory of Regulation: regulation is subject : regulation is subject

to economic laws of demand and supply.to economic laws of demand and supply.

Definitions

Monopoly Behaviour

Natural Monopoly

Regulation

Examples

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Keep in mind:Keep in mind:

Regulatory activities are costlyRegulatory activities are costly, since they call for the , since they call for the

supervision and monitoring of the firms’ internal activities supervision and monitoring of the firms’ internal activities

(cost structures) and of the performance of the market;(cost structures) and of the performance of the market;

Agency discretion should be limitedAgency discretion should be limited, since the , since the

agency might act according to interests different then the agency might act according to interests different then the

society’s;society’s;

Positive economic theory, and not political Positive economic theory, and not political

convenience or ideology, convenience or ideology, should be the main basis of should be the main basis of

regulatory activity.regulatory activity.

Economic RegulationEconomic Regulation

Definitions

Monopoly Behaviour

Natural Monopoly

Regulation

Examples

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Regulation of Natural Regulation of Natural Monopoly: Basic Monopoly: Basic Problems and EffectsProblems and Effects

Regulation through the Regulation through the Rate of Return CapitalRate of Return Capital::

Concept:Concept: Rate Of Return (Rate Of Return (RORROR) - regulation, a firm is ) - regulation, a firm is

allowed to earn no more than a “fair” rate of return on its allowed to earn no more than a “fair” rate of return on its

capital investment, defined as the level of profits per unit of capital investment, defined as the level of profits per unit of

capital used.capital used.

Analysis:Analysis:

i) ROR i) ROR aboveabove the current cost of capital (the the current cost of capital (the

interest rate r)interest rate r)

ii) ROR ii) ROR belowbelow the present cost of capital the present cost of capital

iii) ROR iii) ROR equalequal to the interest rate to the interest rate

Definitions

Monopoly Behaviour

Natural Monopoly

Regulation

Examples

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The firm is allowed to earn no more than a “fair” rate The firm is allowed to earn no more than a “fair” rate

of return on its capital investmentof return on its capital investment

The regulated firm will choose a higher capital-The regulated firm will choose a higher capital-

labour ratio than it would without regulation, thus labour ratio than it would without regulation, thus

being internally inefficientbeing internally inefficient

It is not certain that output will increaseIt is not certain that output will increase

If the regulator sets the maximum rate of return If the regulator sets the maximum rate of return

below the cost of capital, the firm will shut downbelow the cost of capital, the firm will shut down

Under any type of rate of return regulation, the Under any type of rate of return regulation, the

regulated firm will always over-utilise the rate baseregulated firm will always over-utilise the rate base


Definitions

Monopoly Behaviour

Natural Monopoly

Regulation

Examples

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L

K

-w/r

(K/L)*

Q*1

Q*2

Q*3

C3

C2

C1

-w/r

A

B

C

L

K

(K/L)*

Q*1

Q*2

-w/rTRSR

A*

B*AR

BR

(K/L)R

Definitions

Monopoly Behaviour

Natural Monopoly

Regulation

Examples

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There is a logical explanation for this outcome: by There is a logical explanation for this outcome: by imposing a constraint on the rate of return to capital, imposing a constraint on the rate of return to capital, defined as the ratio between revenues minus non-defined as the ratio between revenues minus non-capital costs and the level of capital used, the capital costs and the level of capital used, the regulatory agency is providing an incentive for the regulatory agency is providing an incentive for the firm to increase that level thereby keeping within the firm to increase that level thereby keeping within the constraint with a minimum loss in terms of profits: constraint with a minimum loss in terms of profits:

K K - the rate base – - the rate base – increases increases | | profitsprofits before capital before capital costs (P.Q - w.L) allowed within the constraint costs (P.Q - w.L) allowed within the constraint will be will be largerlarger. .

Any Any reductionreduction in the in the RORROR will lead to further will lead to further over-over-utilisation of capitalutilisation of capital..

Definitions

Monopoly Behaviour

Natural Monopoly

Regulation

Examples

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Other Regulatory Mechanisms Based on Returns:Other Regulatory Mechanisms Based on Returns:

i) i) Regulation of the return on outputRegulation of the return on output: here the firm is : here the firm is

constrained on the level of profit per unit of output sold.constrained on the level of profit per unit of output sold.

ii) ii) Regulation through the rate of return on salesRegulation through the rate of return on sales: the : the

regulatory agency imposes a limit on the amount of profit regulatory agency imposes a limit on the amount of profit

per unit of revenue.per unit of revenue.

iii) iii) Return on cost regulationReturn on cost regulation: the firm is allowed a : the firm is allowed a

certain amount of profit per each unit of cost.certain amount of profit per each unit of cost.

Definitions

Monopoly Behaviour

Natural Monopoly

Regulation

Examples

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Price Cap RegulationPrice Cap Regulation::

CharacteristicsCharacteristics::

i)i) the regulator sets a the regulator sets a maximum price for the marketmaximum price for the market, ,

called the price cap; the firm can set a price equal or called the price cap; the firm can set a price equal or

below this one, and is able to retain all profits;below this one, and is able to retain all profits;

ii)ii) the regulator might the regulator might specify that the price cap will specify that the price cap will

be adjusted over timebe adjusted over time by a preannounced by a preannounced

adjustment factor that is exogenous to the firm - for adjustment factor that is exogenous to the firm - for

instance some form of general price index RPI –X ;instance some form of general price index RPI –X ;

iii)iii) at at long intervalslong intervals, , the price cap is reviewedthe price cap is reviewed by the by the

regulator and possibly changed, considering the profits, regulator and possibly changed, considering the profits,

cost and demand conditions.cost and demand conditions.

Definitions

Monopoly Behaviour

Natural Monopoly

Regulation

Examples

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Price Cap vs. Rate of Return RegulationPrice Cap vs. Rate of Return Regulation

MCU = MCPC

MCROR

ACU

ROR = PC

Q

P

QSBQROR = QP

PSB

PROR

(=P)

Definitions

Monopoly Behaviour

Natural Monopoly

Regulation

Examples

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State ownership State ownership vsvs Privatisation and Privatisation and RegulationRegulation

Social ownership of strategic means of production should be Social ownership of strategic means of production should be ensuredensured

It facilitates the planning of key sectors of economyIt facilitates the planning of key sectors of economy

This only make sense in politically unstable societiesThis only make sense in politically unstable societies

All companies plan and planning is nor alternative, but All companies plan and planning is nor alternative, but complementary to the market systemcomplementary to the market system

It facilities income redistribution, making fundamental utilities It facilities income redistribution, making fundamental utilities and services available to alland services available to all

Leave the provision to the market and make the appropriate Leave the provision to the market and make the appropriate transfers through taxes and price controlstransfers through taxes and price controls

REASONS FOR REASONS FOR STATE STATE

OWNERSHIPOWNERSHIP

Definitions

Monopoly Behaviour

Natural Monopoly

Regulation

Examples

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REASONS FOR REASONS FOR STATE STATE

OWNERSHIPOWNERSHIP

Redistribution Issues – it may be easier to enforce the reduce of Redistribution Issues – it may be easier to enforce the reduce of the prices charged to smaller users of electricity or gas directly the prices charged to smaller users of electricity or gas directly through public provision than by finding appropriate specific forms through public provision than by finding appropriate specific forms of assistanceof assistance

Public ownership allows for the practice of specific pricing policies Public ownership allows for the practice of specific pricing policies - - Cross-subsidiesCross-subsidies that, although not maximizing profit in the sense that, although not maximizing profit in the sense that they allow for profitable areas of clients to subsidise others.that they allow for profitable areas of clients to subsidise others.

Definitions

Monopoly Behaviour

Natural Monopoly

Regulation

Examples

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REASONS FOR REASONS FOR PRIVATISATIONPRIVATISATION

It increases the cost efficiency of firms, that is, the internal It increases the cost efficiency of firms, that is, the internal process of cost minimisation is better achievedprocess of cost minimisation is better achieved

Private firms are more efficient in terms of cost structure than Private firms are more efficient in terms of cost structure than public firms producing the same goods, even if they are under public firms producing the same goods, even if they are under regulatory constrains and have similar technologyregulatory constrains and have similar technology

The main cause of these differences is a change in The main cause of these differences is a change in management behaviour, resulting from the profit-maximizing management behaviour, resulting from the profit-maximizing pressure and from the management concern with the market pressure and from the management concern with the market value of the firm’s shares in the stock market.value of the firm’s shares in the stock market.

Demands from the government an acceptance of the firm’s Demands from the government an acceptance of the firm’s objective of profit maximization and a mind to pursue other objective of profit maximization and a mind to pursue other objectives through regulation and in the case of public utilities, objectives through regulation and in the case of public utilities, possibly also taxation and subsidisationpossibly also taxation and subsidisation

Definitions

Monopoly Behaviour

Natural Monopoly

Regulation

Examples

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The second best

equilibrium –

resulting from price

regulation, for the

private firm (P=AC)

in point P is actually

a better solution in

terms of total welfare

for the market than

the first best

equilibrium achieved

by the state-owned

firm in point S, with

lower price and a

higher output

Definitions

Monopoly Behaviour

Natural Monopoly

Regulation

Examples

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Privatization, De-regulation Privatization, De-regulation and Barriers to Entryand Barriers to Entry

Public UtilityPublic Utility providing one product or providing one product or serviceservice

telecommunications, gas or telecommunications, gas or electricity distributionelectricity distribution

Privatise Privatise butbut independently of any regulation, a independently of any regulation, a new firm should be allowed to enter the market, new firm should be allowed to enter the market, in case it wantsin case it wants

Promote competition and lower prices in the Promote competition and lower prices in the market, benefiting the consumersmarket, benefiting the consumers

Game - Game - theorytheory

Scale EconomiesScale Economies

Definitions

Monopoly Behaviour

Natural Monopoly

Regulation

Examples

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Efficient Pricing in Multi-Efficient Pricing in Multi-product Natural Monopoliesproduct Natural Monopolies

Single-Single-ProductProduct

Multi-Multi-ProductProduct

The cost structure of the firm will The cost structure of the firm will lead to a constrained social welfare lead to a constrained social welfare optimum in which the price the optimum in which the price the consumers were willing to pay for consumers were willing to pay for the last unit consumed is still above the last unit consumed is still above the marginal cost of producing that the marginal cost of producing that unit (P=AC)unit (P=AC)

The design of prices involves The design of prices involves balancing the welfare losses across balancing the welfare losses across product markets as prices deviate product markets as prices deviate from marginal costsfrom marginal costs

Price structure will be dependent Price structure will be dependent both on the cost structure of the firm both on the cost structure of the firm and on the different demand and on the different demand functions faced in each marketfunctions faced in each market

Assume the firm Assume the firm is a natural is a natural monopolymonopoly

Marginal Cost Marginal Cost pricing is pricing is

unsustainableunsustainableRamsey PricesRamsey Prices

Definitions

Monopoly Behaviour

Natural Monopoly

Regulation

Examples

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Efficient Pricing in Multi-Efficient Pricing in Multi-product Natural Monopoliesproduct Natural Monopolies

Welfare loss in market i – more rigid demand

Welfare loss in market j – more elastic demand

Cross-Cross-subsidisationsubsidisation

↓↓Policies in Policies in

which profits in which profits in some markets some markets will subsidise will subsidise

eventual losses eventual losses made in othersmade in others

Definitions

Monopoly Behaviour

Natural Monopoly

Regulation

Examples

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Structural Efficiency, Structural Efficiency, Competition and Vertical Competition and Vertical EconomiesEconomies

Economies Economies

of Scopeof Scope Providing a variety of Providing a variety of products or services products or services using the same network using the same network (Telecommunications)(Telecommunications)

Joint production is done Joint production is done at a lower average cost at a lower average cost than when done than when done separatelyseparately

On the other hand…

Growth in Growth in demand for demand for several several servicesservices

Range across which average costs are Range across which average costs are decreasing for an industry does not anymore decreasing for an industry does not anymore cover all the dimension of the marketcover all the dimension of the market

These two circumstances have led to situations in which the regulatory agencies have chosen to break-up natural

monopolies in terms of market dimension

HORIZONTAL BREAK-UP

Definitions

Monopoly Behaviour

Natural Monopoly

Regulation

Examples

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Structural Efficiency, Structural Efficiency, Competition and Vertical Competition and Vertical EconomiesEconomies

VERTICAL

BREAK-UP

Economies of scale in generation are more limited than in distributionEconomies of scale in generation are more limited than in distribution

Unlike distributors, it is possible for generation to store energy and inputsUnlike distributors, it is possible for generation to store energy and inputs

Distribution has been broken up into regional networks, thus creating a Distribution has been broken up into regional networks, thus creating a market for generatorsmarket for generators

On the other hand…

Uncertainty associated with equipment failures in input process and Uncertainty associated with equipment failures in input process and demanddemand exhaustion of scale economies in generation might not be enough to exhaustion of scale economies in generation might not be enough to guarantee a truly competitiveguarantee a truly competitive

Incentives for large investments hindered by opportunities behaviourIncentives for large investments hindered by opportunities behaviour

A firm joining different stages in the vertical chain will have a wider A firm joining different stages in the vertical chain will have a wider technological knowledgetechnological knowledge

Example of generation and distribution of electricity…Example of generation and distribution of electricity…Definitions

Monopoly Behaviour

Natural Monopoly

Regulation

Examples

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Examples of Examples of MonopoliesMonopolies

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SaltSalt

Until common salt (sodium chloride) was mined in quantity in comparatively recent Until common salt (sodium chloride) was mined in quantity in comparatively recent

times, its availability was subject to the vagaries of climate and environment. A times, its availability was subject to the vagaries of climate and environment. A

combination of strong sunshine and low humidity or an extension of peat marshes combination of strong sunshine and low humidity or an extension of peat marshes

was necessary for winning salt from the sea - the most plentiful source - by solar was necessary for winning salt from the sea - the most plentiful source - by solar

evaporation or boiling. Mines and inland salt springs being scarce and often located evaporation or boiling. Mines and inland salt springs being scarce and often located

in hostile areas like the Dead Sea or the salt mines in the Sahara desert, they in hostile areas like the Dead Sea or the salt mines in the Sahara desert, they

required well-organised security for transport, storage and highly monopolised required well-organised security for transport, storage and highly monopolised

distribution. Changing sea levels flooded many of these sources during certain distribution. Changing sea levels flooded many of these sources during certain

periods and caused salt “famines” and communities were left to the mercy of those periods and caused salt “famines” and communities were left to the mercy of those

who monopolised these few inland sources. The “Gabelle", a notoriously high tax who monopolised these few inland sources. The “Gabelle", a notoriously high tax

levied upon salt, played a role in the start of the French Revolution and is possibly levied upon salt, played a role in the start of the French Revolution and is possibly

the most cruel example in recent history. Anyone was allowed to purchase salt; the most cruel example in recent history. Anyone was allowed to purchase salt;

however, strict legal controls were in place over who was allowed to sell and however, strict legal controls were in place over who was allowed to sell and

distribute salt.distribute salt.

Definitions

Monopoly Behaviour

Natural Monopoly

Regulation

Examples

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AT&TAT&T

For many years, AT&T had been permitted to retain its monopoly status under the For many years, AT&T had been permitted to retain its monopoly status under the

assumption that it was a natural monopoly. The rise of cheap microwave assumption that it was a natural monopoly. The rise of cheap microwave

communications equipment in the 1970s opened a window of opportunity for communications equipment in the 1970s opened a window of opportunity for

competitors--no longer was the acquisition of expensive rights-of-way necessary for competitors--no longer was the acquisition of expensive rights-of-way necessary for

the construction of a long-distance telephone network. In light of this, the FCC the construction of a long-distance telephone network. In light of this, the FCC

permitted MCI (Microwave Communications, Inc) to sell communication services to permitted MCI (Microwave Communications, Inc) to sell communication services to

large-businesses. This technical-economic argument against the necessity of AT&T's large-businesses. This technical-economic argument against the necessity of AT&T's

monopoly position would hold for a mere fifteen years until the beginning of the fiber-monopoly position would hold for a mere fifteen years until the beginning of the fiber-

optics revolution sounded the end of microwave-based long distance.optics revolution sounded the end of microwave-based long distance.

Definitions

Monopoly Behaviour

Natural Monopoly

Regulation

Examples

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Standard OilStandard Oil

By 1890, Standard Oil controlled 88% of the refined oil flows in the United States. By 1890, Standard Oil controlled 88% of the refined oil flows in the United States. Gradually, its market share fell to 64% by 1911. Standard's oil production as a Gradually, its market share fell to 64% by 1911. Standard's oil production as a percentage of total market supply fell to 11 percent by 1911, down from 34 percent percentage of total market supply fell to 11 percent by 1911, down from 34 percent in 1898. By 1911, it was in competition with Associated Oil and Gas, Texaco, Gulf in 1898. By 1911, it was in competition with Associated Oil and Gas, Texaco, Gulf Oil, and 147 independent refineries. (DiLorenzo, Thomas The ghost of John D. Oil, and 147 independent refineries. (DiLorenzo, Thomas The ghost of John D. Rockefeller) Nevertheless, it was claimed by many to be a monopoly.Rockefeller) Nevertheless, it was claimed by many to be a monopoly.As the public became more aware of the Standard Oil trust in allowing its oil As the public became more aware of the Standard Oil trust in allowing its oil companies in different states to be headed by the same board of directors, there companies in different states to be headed by the same board of directors, there was more public support in calling for its dissolution. Eventually, the company was was more public support in calling for its dissolution. Eventually, the company was broken up after the United States Supreme Court declared the trust to be an broken up after the United States Supreme Court declared the trust to be an "unreasonable" monopoly under the Sherman Antitrust Act. Thus, on May 15, "unreasonable" monopoly under the Sherman Antitrust Act. Thus, on May 15, 1911, though Standard Oil's share of the market had been steadily declining from 1911, though Standard Oil's share of the market had been steadily declining from 1900 to 1910 (Standard's share of oil refining was 64% at the time of the trial and 1900 to 1910 (Standard's share of oil refining was 64% at the time of the trial and in competition with over 100 other refiners), the Supreme Court of the United in competition with over 100 other refiners), the Supreme Court of the United States ordered the dissolution of Standard Oil Company into 34 smaller States ordered the dissolution of Standard Oil Company into 34 smaller companies, each with their own board of directors. John D. Rockefeller in 1897 had companies, each with their own board of directors. John D. Rockefeller in 1897 had completely retired from the Standard Oil Company of New Jersey, though he completely retired from the Standard Oil Company of New Jersey, though he continued to own a large fraction of its shares. The notion that Standard was a continued to own a large fraction of its shares. The notion that Standard was a monopoly is rejected by some economists. And, no one claims that they harmed monopoly is rejected by some economists. And, no one claims that they harmed consumers but rather the reverse --that their aggressively competitive practices consumers but rather the reverse --that their aggressively competitive practices drastically lowered prices.drastically lowered prices.

Definitions

Monopoly Behaviour

Natural Monopoly

Regulation

Examples

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BibliographyBibliography

http://www.egwald.com/economics/econpage.php3http://www.egwald.com/economics/econpage.php3

http://in3.dem.ist.utl.pt/master/05micro/http://in3.dem.ist.utl.pt/master/05micro/

http://in3.dem.ist.utl.pt/master/04micro/lecture6.pdfhttp://in3.dem.ist.utl.pt/master/04micro/lecture6.pdf

http://in3.dem.ist.utl.pt/master/03micro/lecture_notes_4.pdfhttp://in3.dem.ist.utl.pt/master/03micro/lecture_notes_4.pdf

http://in3.dem.ist.utl.pt/master/02micro/lecture6.pdfhttp://in3.dem.ist.utl.pt/master/02micro/lecture6.pdf

José Mata, Economia da Empresa, Fundação Calouste Gulbenkian, Lisboa, 2000 José Mata, Economia da Empresa, Fundação Calouste Gulbenkian, Lisboa, 2000

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