Our merchants and masters complain much of the bad effects of high wages in raising the price and lessening the sale of goods. They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people.”
― Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations
Monopoly and Antitrust Policy
(Part C)
by
Charles Lamson
Perfect Competition and Monopoly Compared
One way to understand monopoly is to compare equilibrium output and price in a perfectly competitive industry with the output and price that would be chosen if the same industry organized as a monopoly. To make this comparison meaningful, let us exclude from consideration any technological advantage that a single large firm might enjoy. We begin our comparison with a perfectly competitive industry made up of a large number of firms operating with a production technology that exhibits constant returns to scale in the long run. (Recall that constant return to scale means that average cost is the same whether the firm operates one large plant or many small plants.) Figure 7 shows a perfectly competitive industry at long-run equilibrium, a condition in which price is equal to long-run average costs and in which there are no profits.  Now suppose that the industry were to fall under the control of a single private monopolist. The monopolist now owns one firm with many plants. However, technology has not changed; only the location of decision-making power has. To analyze the monopolist's decisions, we must derive the consolidated cost curves now facing the monopoly.  The marginal cost curve of the new monopoly will simply be the horizontal sum of the marginal cost curves of the smaller firms, which are now branches of the larger firm. That is, to get the large firm's MC curve, at each level of MC we add together the output quantities from each separate plant. To understand why, consider this simple example. Suppose that there is perfect competition and that the industry is made up of just two small firms, A and B, each with upward-sloping marginal cost curves. Suppose that for firm A, MC = $5 at an output of 10,000 units and for firm B, MC equals $5 at an output of 20,000 units. If these firms were merged, what would the marginal cost of the 30,000th unit of output per period be? The answer is $5, because the new larger firm would produce 10,000 units in plant A and 20,000 in plant B. This means that the marginal cost curve of the new firm is exactly the same curve as the supply curve in the industry when it was competitively organized. [The industry supply curve in a perfectly competitive industry is the sum of the marginal cost curves (above average variable cost) of all the individual firms in that industry.]    Also remember that all we did was to transfer decision-making power from the individual small firms to a consolidated owner. The new firm gains nothing at all technologically from being big.  Collusion and Monopoly Compared Suppose now that the industry just discussed did not become a monopoly. Instead, suppose the individual firm owners simply decide to work together in an effort to limit competition and increase joint profits, a behavior called collusion. In this case, the outcome would be exactly the same as the outcome of a monopoly in the industry. Firms certainly have an incentive to collude. When they act independently, they compete away whatever profits they can find. However, as we saw in Figure 8, when price increases to $4 across the industry, the monopolistic firm earns positive profits. Despite the fact that collusion is illegal, it has taken place in some industries. In one significant case in the 1960s, a number of executives of well-known electrical equipment manufacturers were successfully prosecuted for meeting secretly to fix prices and divide up markets. In January 1987, a judge moved to end a pricing agreement among milk producers in New York City that had existed since the 1930s. As a result, the wholesale price of milk dropped between $0.30 and $0.71 per gallon in one week (Case & Fair, p. 265).  *CASE & FAIR, 2004, PRINCIPLES OF ECONOMICS, 7TH ED., PP. 263-265* end |
No comments:
Post a Comment