MONOPOLY and Antitrust

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Krishnakali Sen Gupta

MONOPOLYANDANTITRUST 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. Areserve 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: • Acompetitive firm produces output where P = MR = MC and charges P = MC. • Amonopoly 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 < QAand PS < PA Personal Seat Licences • Personal seat licences (PSLs) are another way teams can extract consumer surplus. • APSL 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 ofAmerica Stadium. • Use of PSLs increasing. On the surface, selling PSLs doesn’t make much economic sense. à It doesn’t change consumers willingness to pay à 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  PSLwould not increase revenues but they would change the way revenues were collected  U.S tax laws allow teams to deduct PSLrevenues 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. à 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. • We can approximate average total costs, ATC, as: • As the nu
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