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jadeant545Lv1

28 Sep 2019

An important reason for the economic regulation of the industry is the presence of a natural monopoly.

A. Briefly explain what is meant by a natural monopoly.

B. How is a natural monopoly efficient in one way but inefficient in another?

C. Discuss two ways in which a regulatory commission could eliminate the inefficiency associated with a natural monopoly.

D. Does your answer above meet the incentive regulation criteria?

Explain.

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Chika IlonahLv10

28 Sep 2019

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What valuable company is nobody building? This question is harder than it looks, because your company could create a lot of value without becoming very valuable itself. Creating value isn't enough -- you also need to capture some of the value you create. This means that even very big businesses can be bad businesses. For example, U.S. airline companies serve millions of passengers and create hundreds of billions of dollars of value each year. But in 2012, when the average airfare each way was $178, the airlines made only 37 cents per passenger trip. Compare them to Google, which creates less value but captures far more. Google brought in $50 billion in 2012 (versus $160 billion for the airlines), but it kept 21% of those revenues as profits -- more than 100 times the airline industry's profit margin that year. Google makes so much money that it is now worth three times more than every U.S. airline combined. The airlines compete with each other, but Google stands alone. Economists use two simplified models to explain the difference: perfect competition and monopoly. "Perfect competition" is considered both the ideal and the default state in Economics 101. So-called perfectly competitive markets achieve equilibrium when producer supply meets consumer demand. Every firm in a competitive market is undifferentiated and sells the same homogeneous products. Since no firm has any market power, they must all sell at whatever price the market determines. If there is money to be made, new firms will enter the market, increase supply, drive prices down and thereby eliminate the profits that attracted them in the first place. If too many firms enter the market, they'll suffer losses, some will fold, and prices will rise back to sustainable levels. Under perfect competition, in the long run no company makes an economic profit. The opposite of perfect competition is monopoly. Whereas a competitive firm must sell at the market price, a monopoly owns its market, so it can set its own prices. Since it has no competition, it produces at the quantity and price combination that maximizes its profits. To an economist, every monopoly looks the same, whether it deviously eliminates rivals, secures a license from the state or innovates its way to the top. I'm not interested in illegal bullies or government favorites: By "monopoly," I mean the kind of company that is so good at what it does that no other firm can offer a close substitute. Google is a good example of a company that went from 0 to 1: It hasn't competed in search since the early 2000s, when it definitively distanced itself from Microsoft and Yahoo! Americans mythologize competition and credit it with saving us from socialist bread lines. Actually, capitalism and competition are opposites. Capitalism is premised on the accumulation of capital, but under perfect competition, all profits get competed away. The lesson for entrepreneurs is clear: If you want to create and capture lasting value, don't build an undifferentiated commodity business. How much of the world is actually monopolistic? How much is truly competitive? It is hard to say because our common conversation about these matters is so confused. To the outside observer, all businesses can seem reasonably alike, so it is easy to perceive only small differences between them. But the reality is much more binary than that. There is an enormous difference between perfect competition and monopoly, and most businesses are much closer to one extreme than we commonly realize. The confusion comes from a universal bias for describing market conditions in self-serving ways: Both monopolists and competitors are incentivized to bend the truth. Monopolists lie to protect themselves. They know that bragging about their great monopoly invites being audited, scrutinized and attacked. Since they very much want their monopoly profits to continue unmolested, they tend to do whatever they can to conceal their monopoly -- usually by exaggerating the power of their (nonexistent) competition. Think about how Google talks about its business. It certainly doesn't claim to be a monopoly. But is it one? Well, it depends: a monopoly in what? Let's say that Google is primarily a search engine. As of May 2014, it owns about 68% of the search market. (Its closest competitors, Microsoft and Yahoo!, have about 19% and 10%, respectively.) If that doesn't seem dominant enough, consider the fact that the word "google" is now an official entry in the Oxford English Dictionary -- as a verb. Don't hold your breath waiting for that to happen to Bing. But suppose we say that Google is primarily an advertising company. That changes things. The U.S. search-engine advertising market is $17 billion annually. Online advertising is $37 billion annually. The entire U.S. advertising market is $150 billion. And global advertising is a $495 billion market. So even if Google completely monopolized U.S. search-engine advertising, it would own just 3.4% of the global advertising market. From this angle, Google looks like a small player in a competitive world. What if we frame Google as a multifaceted technology company instead? This seems reasonable enough; in addition to its search engine, Google makes dozens of other software products, not to mention robotic cars, Android phones and wearable computers. But 95% of Google's revenue comes from search advertising; its other products generated just $2.35 billion in 2012 and its consumer-tech products a mere fraction of that. Since consumer tech is a $964 billion market globally, Google owns less than 0.24% of it -- a far cry from relevance, let alone monopoly. Framing itself as just another tech company allows Google to escape all sorts of unwanted attention. Non-monopolists tell the opposite lie: "We're in a league of our own." Entrepreneurs are always biased to understate the scale of competition, but that is the biggest mistake a startup can make. The fatal temptation is to describe your market extremely narrowly so that you dominate it by definition. Suppose you want to start a restaurant in Palo Alto that serves British food. "No one else is doing it," you might reason. "We'll own the entire market." But that is only true if the relevant market is the market for British food specifically. What if the actual market is the Palo Alto restaurant market in general? And what if all the restaurants in nearby towns are part of the relevant market as well? These are hard questions, but the bigger problem is that you have an incentive not to ask them at all. When you hear that most new restaurants fail within one or two years, your instinct will be to come up with a story about how yours is different. You'll spend time trying to convince people that you are exceptional instead of seriously considering whether that is true. It would be better to pause and consider whether there are people in Palo Alto who would rather eat British food above all else. They may well not exist. In 2001, my co-workers at PayPal and I would often get lunch on Castro Street in Mountain View, Calif. We had our pick of restaurants, starting with obvious categories like Indian, sushi and burgers. There were more options once we settled on a type: North Indian or South Indian, cheaper or fancier, and so on. In contrast to the competitive local restaurant market, PayPal was then the only email-based payments company in the world. We employed fewer people than the restaurants on Castro Street did, but our business was much more valuable than all those restaurants combined. Starting a new South Indian restaurant is a really hard way to make money. If you lose sight of competitive reality and focus on trivial differentiating factors -- maybe you think your naan is superior because of your great-grandmother's recipe -- your business is unlikely to survive. The problem with a competitive business goes beyond lack of profits. Imagine you're running one of those restaurants in Mountain View. You're not that different from dozens of your competitors, so you've got to fight hard to survive. If you offer affordable food with low margins, you can probably pay employees only minimum wage. And you'll need to squeeze out every efficiency: That is why small restaurants put Grandma to work at the register and make the kids wash dishes in the back. A monopoly like Google is different. Since it doesn't have to worry about competing with anyone, it has wider latitude to care about its workers, its products and its impact on the wider world. Google's motto -- "Don't be evil" -- is in part a branding ploy, but it is also characteristic of a kind of business that is successful enough to take ethics seriously without jeopardizing its own existence. In business, money is either an important thing or it is everything. Monopolists can afford to think about things other than making money; non-monopolists can't. In perfect competition, a business is so focused on today's margins that it can't possibly plan for a long-term future. Only one thing can allow a business to transcend the daily brute struggle for survival: monopoly profits. So a monopoly is good for everyone on the inside, but what about everyone on the outside? Do outsize profits come at the expense of the rest of society? Actually, yes: Profits come out of customers' wallets, and monopolies deserve their bad reputation -- but only in a world where nothing changes. In a static world, a monopolist is just a rent collector. If you corner the market for something, you can jack up the price; others will have no choice but to buy from you. Think of the famous board game: Deeds are shuffled around from player to player, but the board never changes. There is no way to win by inventing a better kind of real-estate development. The relative values of the properties are fixed for all time, so all you can do is try to buy them up. But the world we live in is dynamic: We can invent new and better things. Creative monopolists give customers more choices by adding entirely new categories of abundance to the world. Creative monopolies aren't just good for the rest of society; they're powerful engines for making it better. Even the government knows this: That is why one of its departments works hard to create monopolies (by granting patents to new inventions) even though another part hunts them down (by prosecuting antitrust cases). It is possible to question whether anyone should really be awarded a monopoly simply for having been the first to think of something like a mobile software design. But something like Apple's monopoly profits from designing, producing and marketing the iPhone were clearly the reward for creating greater abundance, not artificial scarcity: Customers were happy to finally have the choice of paying high prices to get a smartphone that actually works. The dynamism of new monopolies itself explains why old monopolies don't strangle innovation. With Apple's iOS at the forefront, the rise of mobile computing has dramatically reduced Microsoft's decadeslong operating system dominance. Before that, IBM's hardware monopoly of the 1960s and '70s was overtaken by Microsoft's software monopoly. AT&T had a monopoly on telephone service for most of the 20th century, but now anyone can get a cheap cellphone plan from any number of providers. If the tendency of monopoly businesses was to hold back progress, they would be dangerous, and we'd be right to oppose them. But the history of progress is a history of better monopoly businesses replacing incumbents. Monopolies drive progress because the promise of years or even decades of monopoly profits provides a powerful incentive to innovate. Then monopolies can keep innovating because profits enable them to make the long-term plans and finance the ambitious research projects that firms locked in competition can't dream of. So why are economists obsessed with competition as an ideal state? It is a relic of history. Economists copied their mathematics from the work of 19th-century physicists: They see individuals and businesses as interchangeable atoms, not as unique creators. Their theories describe an equilibrium state of perfect competition because that is what's easy to model, not because it represents the best of business. But the long-run equilibrium predicted by 19th-century physics was a state in which all energy is evenly distributed and everything comes to rest -- also known as the heat death of the universe. Whatever your views on thermodynamics, it is a powerful metaphor. In business, equilibrium means stasis, and stasis means death. If your industry is in a competitive equilibrium, the death of your business won't matter to the world; some other undifferentiated competitor will always be ready to take your place. Perfect equilibrium may describe the void that is most of the universe. It may even characterize many businesses. But every new creation takes place far from equilibrium. In the real world outside economic theory, every business is successful exactly to the extent that it does something others cannot. Monopoly is therefore not a pathology or an exception. Monopoly is the condition of every successful business. Tolstoy famously opens "Anna Karenina" by observing: "All happy families are alike; each unhappy family is unhappy in its own way." Business is the opposite. All happy companies are different: Each one earns a monopoly by solving a unique problem. All failed companies are the same: They failed to escape competition.

According to the article above by Peter Thiel do you think perfect competition is best for the economy and for consumers? Why or why not? What does Peter Thiel think about perfect competition versus monopolies?

1. Another term for an investment good is

A) interest
B) savings
C) capital
D) rent
E) production

2. The opportunity cost of producing capital is

A) decreased current production of consumption goods
B) increased future production of consumption goods
C) the amount of roundabout production
D) abundant capital accumulation
E) the decreased amount of future capital available

A marginal revenue product curve shows the change in

A) total revenue caused by a one-unit change in output, other things constant
B) total revenue caused by a one-unit change in an input, other things constant
C) total product caused by a one-unit change in output, other things constant
D) total product caused by a one-unit change in an input, other things constant
E) total revenue product caused by a one-unit change in the price of the output, other things constant

Marginal revenue product for a price taker equals

A) MP x P
B) MP/MRC
C) MP x MRC
D) MRC/MP
E) MP/P

Interest provides an incentive for households to defer current consumption

A) True
B) False

An increase in the interest rate tends to increase the demand for loanable funds.

A) True
B) False

Generally, the longer the maturity on a bond, the lower the interest rate.

A) True
B) False

Corporations can obtain investment funds by

A) buying government securities
B) selling stock
C) increasing dividends
D) purchasing more capital
E) buying back stock

Vertical integration has no effect on the internal organization of a firm; it only affects the outside markets.

A) True
B) False

10.

One reason a computer manufacturer may produce its own microchips rather than buy them is that it can maintain control over production quality.

A) True
B) False

11.

When a firm is no longer able to reduce its long-run average cost by expanding, it has achieved its minimum efficient scale of production.

A) True
B) False

12.

If a firm experiences economies of scope, per unit production costs fall as it produces more than one kind of product.

A) True
B) False

13.

Publications such as Consumer Reports magazine

A) increase the optimal amount of information gathered
B) reduce the optimal amount of information gathered
C) reduce the amount of common knowledge
D) raise the marginal benefit of information curve
E) make consumers perfectly informed

14.

The winner's curse is more likely when the value of a good at auction is uncertain.

A) True
B) False

15.

When a seller knows more about the condition of a used car than the buyer does, the information is said to be asymmetric.

A) True
B) False

16.

The three kinds of government regulation designed to alter or control firm behavior are:

A) Antitrust policy, lobbying, and social regulation
B) Economic regulation, antitrust policy, and lobbying
C) Social regulation, lobbying, economic regulation
D) Social regulation, economic regulation, and antitrust policy
E) Social regulation, antitrust policy, fiscal policy

17.

A monopoly is likely to charge a higher price than an otherwise similar competitive industry would be.

A) True
B) False

18.

Public policy can help achieve more efficient use of an economy's resources by eliminating all monopolies.

A) True
B) False

19.

Government attempts to prohibit monopolization of a market are known as

A) antitrust regulation
B) economic regulation
C) social regulation
D) anticompetitive regulation
E) Herfindahl regulation

20.

If the electric company is allowed by regulators to earn only a normal profit, it will produce at the point where

A) MR = MC
B) P = MC
C) MC = quantity demanded
D) P = AC
E) MR = AC

apricotworm832

Public subsidies for new stadiums and arenas are commonly justified on the basis of economic benefits they will confer on the local economy rather than on public consumption externalities or on the value of an enhanced community image. Yet there is virtually no evidence of any perceptible economic development benefits from sports teams or stadiums. How, then, have sports leagues been so successful in persuading government officials and voters to subsidize their industry when they seem to promote the losing argument? Many referendums on using tax revenue to construct sports stadiums and arenas have been closed (Fort, 1997). At the end of the controversy, however, almost all cities have contributed public funds to subsidize private, for-profit teams owned by some of the wealthiest individuals in the world. The close votes suggest that stadium proponents-team owners and players-have been quite sophisticated in their appeals. If the votes had been overwhelmingly in favor of the subsidies, the proponents probably sought too little. If the voters had not generally approved the subsidies, they asked for too much. Part of the explanation for the success of subsidies for sports stadiums relies on the distribution of benefits and costs. Only a small proportion of people in any metropolitan area attend professional team sports contests. But those who do often are intensely interested. Thus substantial benefits accrue to some individuals, motivating them to become politically active in supporting the use of tax revenue to procure or retain a team. Team owners and players are also well organized and have low-cost access to the media in their effort to promote subsidization. In contrast, most voters do not find it in their interest to oppose actively a referendum that may cost them $25 or $50 per year in additional taxes. The issue is complex, the subsidies are indirect, and the proponents have almost all of the information. Those who are motivated to oppose the subsidies frequently are poorly funded, disorganized and politically naive. Misleading "economic impact statements" commissioned by the proponents of subsidization often confuse the public. As we have seen, these studies are fraught with methodological errors that may be easily overlooked for those not trained in economics. Given the close votes, the studies can be enormously effective even if they deceive only 2 or 3 percent of the voters

There are various ways to correct monopoly abuses, including government ownership, "public utility" type regulation, and injecting competition into the industry. Direct regulation has more appeal when there is a clear natural monopoly, which does not appear to be the case for professional sports. No one believes that two baseball teams in Chicago cause problems similar to those that would arise from duplicate water or electricity distribution systems. Direct regulation also risks the usual inefficiencies associated with political rather than economic motives, muting incentives for working, saving, investing and entrepreneurial activity. New entry would introduce competition to the monopoly sports leagues, but it is unlikely. Many have tried, but few have succeeded (Quirk and Fort, 1992, chs. 8-9). The successes came primarily in the 1960s and 1970s, after a long period during which franchise expansion in the major sports leagues failed to keep pace with population growth, and in the midst of rapidly increasing demand for sports entertainment fueled by the coming of sports interest age of the post-World War II baby boomers and the expansion of access to television. Those were days before astronomical broadcast rights contracts and stadium subsidies had driven players' salaries beyond the realm of normal incomes, and before the leagues realized that they could restrict the number of franchises so much as to attract an entirely new league. Today it would be difficult, if not impossible, for a new league to successfully enter any of the four major team sports, and individual teams cannot enter without the cooperation of incumbents because they would have no one to play. Unfortunately, the successful entrants three decades ago-the American Football League, the American Basketball Association and the World Hockey Association-all too quickly recognized their financial interest in joining rather than fighting the established leagues whose monopoly power they had challenged. In the case of football, in 1966 Congress even went so far as to pass special interest legislation that immunized the merger of the American and National Football Leagues from antitrust challenge. One possible road to remedy would be for the U.S. Conference of Mayors and the National Governors' Association to agree not to use publicly collected monies to finance the construction or maintenance of a sports facility for a privately-owned team (Rosentraub, 1997). While initiatives to this effect have been brought before these groups in the past, no action has ever been taken. The problem is that at any one point in time there are just a few cities or states affected by the demand for a new sports facility. Those mayors or governors not facing a threat are not inclined to alienate the professional leagues with whom they have or want a relationship. Moreover, the prospect of attracting a team with a subsidy may be too great a temptation for any one community to resist, and there is virtually no cost to a community for cheating on such a voluntary agreement. A variant of this scheme was proposed by U.S. Senator Daniel Patrick Moynihan, who proposed a bill that would have prohibited the use of the federal tax exemption on municipal bonds for sports facilities where privately-owned teams would play. Like many similar efforts, Moynihan's bill died in committee. Divestiture may be the best remaining option. Each of the professional sports leagues is now approaching 30 teams. Dividing each sport into, say, four separate leagues could instill important elements of competition without destroying the value of a championship playoff. Competition could prevail in the market for players and, more importantly, in the market for team locations. Individual leagues might be exempted from antitrust prosecution for intra-league coordination, but coordination other than to arrange uniform playing rules and a championship playoff among the leagues would be prohibited. The National Collegiate Athletic Association (NCAA) provides an example of such an organization of leagues. Although the NCAA is intimately involved in the regulation of the player labor market, it does not constrain either the size of college sports leagues or team locations. The various leagues participate jointly in many national championship competitions. Divestiture would solve many of the problems plaguing professional sports. The competitive imbalance problem would be ameliorated as teams with large revenue bases found their home territories invaded by entrants from smaller revenue bases in the other leagues. Such invasions would persist until revenue potential per team was approximately equal on the margin. Cities that could financially support new franchises would find entry into one of the leagues easier and (much) cheaper as the leagues competed to add viable new locations. Attractive places for sports teams (like Los Angeles for football or Washington, D.C., for baseball) would find interest from currently struggling franchises and probably would not have to provide a free stadium or arena to procure a team. Television networks could play the competitive leagues off against each other in bidding for broadcasting rights, which would likely fall precipitously. The most serious risk in a sports industry comprised of competing leagues is the possibility that one league will eventually be viewed as "better" than the others, and the weaker leagues will fail or be absorbed by the stronger leagues. Minimally, the legislation would be needed to permit periodic divestiture if this should occur. An alternative approach is to prohibit existing leagues from exercising collective control over team relocations. This approach would reduce the disparity in revenue potential because some teams from markets with lower revenue potential would invade the geographic territories of teams currently monopolizing the largest revenue potential markets. The result, for instance, could easily be more baseball teams in New York City and Los Angeles. Competitive team imbalance would decline because the revenue potential would equalize across teams as the geographic territories of current "haves" were invaded by current "have nots." Subsidies from cities to teams would shrink because leagues would be unable to prevent teams from competing to enter a city offering attractive market potential. Player salaries also would decline because both local television revenues and government subsidies would decline. Some cities would lose teams initially, but this would apply political pressure on the leagues to expand the number of franchises, thereby helping to attenuate the ultimate source of their market power. Franchise mobility may increase in the short run but should stabilize once a balance between demand for and supply of teams is established. Introducing competition into the market for franchise locations could be accomplished by either congressional or judicial action. Even with competitive leagues, existing teams would have some leverage in negotiating for publicly subsidized playing facilities because fans develop emotional ties to particular teams. The collection of such ties constitutes a sunk investment in a particular team for a community and can rationalize subsidies to retain a particular franchise that would not be sensible if the identity of the service provider were of no concern to fans. A common solution to such contracting problems (similar to those which arise between a coal mine and a single purpose railroad spur to the mine) is common ownership-that is, vertical integration. In the context of professional sports, vertical integration would constitute common ownership of the team and the emotional investment in it-in short, team ownership by the municipal government. Unfortunately, at the top level, none of the four major team sports leagues in the United States permit municipal ownership.9 This restriction is also subject to challenge under the Sherman Antitrust Act, but unless or until it is overturned, it is another way in which monopoly power stands in the way of economic efficiency in professional sports. Implementing either divestiture or a competitive market for team relocations would be a substantial challenge. Either reform would make team owners and players worse off. Both groups are well organized and have powerful incentives to maintain any monopoly power that enhances team revenues. Taxpayers, in contrast, would end up better off as a result of either reform. We believe that potential gains to the winners exceed the likely burden on the losers because the reforms, which rely on competitive prices to shape the allocation of resources between the private and public sectors and within the public sector itself, should improve efficiency. However, because the winners are a diffuse group of numerous individuals with but modest individual incentives to press for reform, the prospects for change are grim.

------------------------------------------------Question

According to the article by Siegfried and Zimbalist, what do they recommend as the most effective policy for reducing team bargaining power with state and municipal governments? That is, what policy do they suggest so that local governments will no longer have to subsidize new stadiums? Explain.

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