MGMT 4A Lecture Notes - Lecture 17: Joseph Schumpeter, Price Gouging, Perverse Incentive
Document Summary
Lesson 6 part 2: monopoly, monopolistic competition, and the strategy-marketing nexus. Module 3: regulating natural monopoly; the p=ac rules; x-efficiency under cost-plus. The graph that illustrates natural monopoly is characterized by increasing returns to scale over the relevant range of output. Increasing returns to scale means natural monopolist eventually captures the entire market. Use tools like antitrust to break up the monopoly. If you break up a monopoly, you will have smaller firms operating. Not efficient because the cost will still be just as high due to demand and the smaller firms won"t produce the service/product as efficiently as a monopoly. Just allow the natural monopoly to exist but regulate its price. Monopoly earns zero economic profits, less price gouging, smaller deadweight loss. Subsidizing a big monopoly may not appeal to taxpayers and voters. Under the p = ac rule, you"re basically guaranteed the recovery of any costs that you incur.
