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MONOPOLY AND ANTITRUST all notes.docx

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Department
Economics
Course
ECON 2P03
Professor
Hannah Holmes
Semester
Fall

Description
MONOPOLY AND ANTITRUST Monopoly Review  Founded in 1876 (oldest league in the US), MLB’s National League (NL) had 2 basic principles:  1. Clubs had the exclusive right to their home territory.  This gave teams monopoly power in their host cities.  2. A reserve system where players were bound to their club as long as the club wanted them.  This gave teams monopsony power over its players.  Leagues today continue to exert market power.  Eliminating competition may be good for the teams, but it’s not good for consumers.  Fewer teams in fewer cities results in fewer games and higher prices for fans.  If sports were a competitive industry, there would be more teams and lower ticket prices.  Recall:  A competitive firm produces output where P = MR = MC and charges P = MC.  A monopoly produces output where MR = MC and charges P > MC.  Monopolists  Charge more (Pm>Pc)  Produce less (Qm MC  Consumer surplus = APmE  Producer surplus = PmEQmC  QmEQc is surplus no one gets – it’s the deadweight loss Price Discrimination  Leagues could reduce deadweight loss by practicing price discrimination – charging different prices to different consumers based on their willingness-to-pay.  Consider the Toronto Blue Jays (whose average ticket price is ~$110 btw).  If they knew exactly what every ticket buyer would be willing to pay, they could charge every ticket buyer their willingness-to-play. This would be first degree (perfect) price discrimination.  The jays would capture all the available surplus  There would be no dead weight loss  However, no consumer surplus  If the Jays can perfectly price discriminate then MR curve coincides with their Demand curve. There for (P = MR)  With first degree price  discrimination, the Jays  capture all surplus in the  market – the entire green  triangle. If the Jays don’t know every consumer’s willingness-to-pay, they do know that the demand curve slopes downward.  They could practice second degree price discrimination – charge different prices based on the quantity consumers buy.  Team knows less than before  Knows demand slopes down  If it doesn’t discriminate  Charges P1 per ticket  Consumer buys Q1 for P1  If it discriminates  Pa for 1st ticket batch  P1 for 2nd ticket batch  Pb for 3rd ticket batch  Team captures some consumer surplus with  Group sales or season tickets  Consumers get yellow triangles  If the Jays are only able to distinguish that certain groups have different willingnesses-to-pay, they can resort to third degree price discrimination – charge different prices for different segments of the market.  Say they know that students have less disposable income than middle-agers and are more sensitive to price (students’ demand is less and more elastic).  Put students on the left side  They have lower demand than adults  MC is the same  QS < QA and PS < PA Personal Seat Licences  Personal seat licences (PSLs) are another way teams can extract consumer surplus.  A PSL gives a consumer, for a fixed fee, the right to buy season tickets for a given period of time.  If you have a PSL, you have to buy tickets or you lose your PSL.  First used by the NFL’s Carolina Panthers to help fund the building of their Bank of America Stadium.  Use of PSLs increasing. On the surface, selling PSLs doesn’t make much economic sense.  It doesn’t change consumers willingness to pay  To offset the higher cost to consumers of buying tickets, the team would have to increase the benefits consumers receive or charge a lower price for tickets  PSL would not increase revenues but they would change the way revenues were collected  U.S tax laws allow teams to deduct PSL revenues from their taxable income  Using PSLs allows teams to claim the deadweight loss that results from monopoly.  Dallas Cowboys’ PSLs sell for up to $150,000; other teams start around the $11000 mark (you can pay it in installments). What’s Right with Monopoly  It’s not always that easy to identify a monopoly.  Consider the Boston Bruins.  Since Boston only has one professional hockey team, we would logically conclude that the Bruins are a monopoly.  The Bruins, however, could argue that they operate in a very competitive market.  They could argue that they have to compete for attention with the Celtics, Red Sox, Patriots, college hockey teams, other college sports… If they can’t convince you that they’re in a competitive market, they might be able to convince you that they’re a natural monopoly.  Natural monopoly arise when large firms operate more efficiently than smaller ones (lower average total cost (ATC) if one firm than if more than one firm)  Large efficient size usually results when firms face large start-up costs & low marginal costs  The Bruins’ payroll in a given season is a fixed cost – it doesn’t depend on the number of tickets sold.  Likewise for arena costs that don’t depend on attendance.  The MC of accommodating an additional fan is very small, so costs don’t rise much beyond fixed costs until the arena is sold out
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