Antitrust Laws and Government Regulation of Monopolies
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Alright. So we've seen how monopolies will restrict their output to increase profits. Well, sometimes this gets out of hand and the government will step in to regulate, let's check out some of their options. So, the first, uh topic we want to go over here is the antitrust laws when they started coming about in the late 18 hundreds, early 19 hundreds, there was problems with trust. Now it's monopolies, right? They just kind of changed form. So they're still called antitrust laws, but they're dealing with monopolies. Okay. So the whole point of these laws is to limit the market power of the monopolies, right? So that they can't just completely have control over a market how much they want to produce to maximize their profits. Right? So in the US, we've had quite a few laws that have come out, these are some of the most substantial ones. Um, and we're not gonna go into a lot of detail, let's just kind of, on a high level, just discuss what these laws do. And you can see how they're kind of restricting the monopolies power. Cool. So the first one was the Sherman Act of 18 90 and this one prohibited collusion and price fixing. And this was between firms, Right? So there was different firms um, between firms that were basically colluding. So collusion is when firms that, that are separate firms worked together to set prices or output. So, you can imagine if you and me, we're the only producers of a product and we got together under the table, we're like, hey, I know the going price is $5 for this product. But if you charge $10 and I charge $10, there's nothing anyone can do about it. Let's set this higher price and we'll make more money, right? So that's obviously, that's not good for the economy for these competitors to start working together, right? It reduces the competition, it's not good. So, this act prohibited that collusion. Cool. Um, the next one, the Clayton Act, well, it prohibited, um, companies from buying stock in their competitors or serving on the competitors. Board of directors, right? You can see that that sounds like a red flag right there buying competitors stock. That just doesn't sound right, right? So that was prohibited in 1914. And at the same time, this same, uh, in the same era, in the 1914, they created the Federal Trade Commission. So F. T. C. Is the Federal Trade Commission, and they basically enforce these laws. There's these antitrust laws and the FTC has been charged to enforce them. Cool. The next one was this Robinson Patman Act of 1936, and this one prohibited price discrimination. So, we talked about price discrimination a little bit right, charging different prices to different customers. Well, it doesn't prohibit price discrimination altogether, right? We even saw some real world examples of price discrimination. It had to be price discrimination. That was reducing competition, right? So anytime we're reducing competition, that's increasing the market power of the firm, they're gonna have more influence over the price, more influence over the output to the economy. Right? So, anything that's reducing competition is generally seen as a bad thing, just like we see with this last one, this seller Kefauver act, Right? I'm not sure if I'm saying that, totally right, but I think that's what it is. Um, and this act, it prohibited mergers that would reduce competition. Alright, so mergers, that's when two firms merged together. Right. And not all mergers are prohibited. There's still, um, guidelines for how to how a merger should be allowed or disallowed. But basically, it created this idea that if the merger was reducing competition substantially, then that merger should not be allowed to happen. Cool. So, you can see that all of these things were um, limiting the power of monopolies, Right? So, there's more than just these. These are the main ones that, that kind of get highlighted in the books and there they've been around for a long time here. Cool. Alright, so now let's go on and see a different way that the government can regulate other than just making laws. Cool. Let's check that out in the next video
Monopoly:Socially Optimal Price and Fair-Return Price
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Alright. So the government could also get directly involved in the market and set price ceilings on what a monopoly can charge. Okay, So the government can also regulate a monopoly through the use of price ceilings. Cool. Remember that price ceilings is a maximum amount that could be charged. So they're setting a limit on the price. What is the highest price that could be charged? Well, they have two options when they're trying to figure out a correct price ceiling. The first one is a socially optimal price like we have on the left graph, and this is the socially optimal price is going to be where price equals marginal cost, right? And remember socially optimal, we're trying to get the efficient amount of production, right? If we if the price equals marginal cost, that means that all of the benefits, right? Remember that the price represents the marginal benefit to consumers right? To the last, the last unit sold, that marginal that price is the marginal benefit to that last user, Right? And the marginal cost, Well, that's the marginal cost of the firm. So, socially optimal is where the marginal benefit equals the marginal cost. So price equals marginal cost is socially optimal. So, that would be something like this. Like we see on this graph, this would be the price. And I'm gonna put S. O. For socially optimal. I just made that up right now, it's not a real thing. Okay, so the price of a socially optimal price is right there where mark, where the demand and marginal cost meat, Right? So if we go down this line right here, we're gonna see that at this price, right? If we go here, we're gonna see that the demand curve and the marginal cost curve are touching right? And that is going to mean that we're going to produce all of the units that there is a benefit to produce, right? So we're gonna make the efficient quantity of units the same amount that would be produced in, say perfect competition, right? We're reaching that efficient equilibrium quantity. But however, notice what could happen. This is a potential outcome is like look at the average total cost at that point. So if we're producing out here at this quantity, right at this quantity, the socially optimal quantity. S o I'll put quantity socially optimal quantity. We'll look at the profit to the firm if this is the price right here, and this is the average total cost. Well, the firm's actually got a loss right from from the price to the average total cost, there's gonna be a loss of all of this amount, right? Everything right here is all lost to the firm. Okay? Um And this is a potential uh downfall of the socially optimal price, right? Because we've got these average total cost and the average total cost curve could be above um our our price. Okay, So it's not always the case, but that is a side effect of the social optimal prices. Okay. And um but as we see underneath, right, we are benefit is that we get this maximum efficiency, right? We're getting all of the trades we want to make, and we're maximizing total surplus. But like we said, there's that negative where there could actually be losses to the monopoly And there if there's long term losses, right? If they can't cover average total cost, then they can't run the business, right? They would have to exit the business in the long run, because they can't cover their total cost. Okay? So that this is the socially optimal price we'll get we'll get to this last bit the incentive to minimize costs. After we discuss fair return price. Okay? So the fair return price. This is the other option is where price equals average total cost. So remember where price equals average total cost. That's productive efficiency, right? We're looking for productive efficiency were producing at the lowest possible cost. Okay, So, no. So notice when we're talking about the socially optimal, we're kind of more considering allocated efficiency over here, Right, allocated. And over here, we're talking about productive efficiency, right? We're trying to minimize costs over here. Okay? So notice at the fair return price, they are able to cover their total cost, right? But when price equals average total cost, there's no profit, right? Price equals average total cost. There's no profit there. So notice at this price level right here, the p and I'll put f r for fair return, Well, let's go over to the demand curve at that price. And notice it's touching the average total cost at that price as well, right? So, when price and average total costs are the same, right? We've got no profit, so there's no economic profit for the firm. Um But we're not being fully efficient. Right? The fully efficient point would have been way out here. Like we saw in the other example, let me do it a different color um out here where the marginal cost curve touches the demand curve. Right? So, since we didn't get the efficient quantity, we instead have the the fair return quantity right here, quantity, fair return over here being that quantity. That's socially optimal, right? That equilibrium quantity, really? Um Well, since we didn't make all those trades, we ended up with this dead weight loss right here, right? This area right here, those trades were not made, and that is our dead weight loss. Okay, so this area right here is dead weight loss. So, what do we see? We have lowered the deadweight loss, right? Because if we didn't regulate at all, we would have been producing way down here, right? Where marginal revenue and marginal cost cross and we would have had a huge deadweight loss, right? Something like all of this area would have also been dead weight loss in the case of them not being regulated at all. Right? So, we're lowering the deadweight loss, at least there's less dead weight loss, but also, now, the monopolies are earning zero profit, right? There's no profit for the monopoly anymore. Um And then there's this last point, that's true for either case, the incentive to minimize cost, they don't have it anymore, right? Since they are being forced to charge what there's costs are Well, now, they should try and inflate their cost as much as possible, right? They might try and have tons of entertainment expenses, taking clients out to baseball games, fancy dinners, anything that they can turn into a cost of the firm. Well, they're gonna do it. They're not gonna try their hardest to minimize cost anymore, because they can set their price at this average total cost, Right? So then that adds other layers of regulate, right? So, it gets pretty difficult. But, you know, for this class and this purpose, it's more just about knowing about these points and the repercussions of these types of things. Cool, Alright, so this is the the other option that governments have, right? They can put antitrust laws to just regulate and prohibit uh actions of monopolies, or they can step into the market itself and put price ceilings at at these socially optimal or fair return prices. Cool. Alright, let's go ahead and move on to the next video