Chapter 9.docx

3 Pages
Unlock Document

University of Toronto St. George
Paul Cohen

Chapter 9: Monopoly Rules (Government Regulation, Competition, and the Law) Natural Monopolies create a challenge for policymakers—gain the low-cost efficiencies of economies of scale, but avoid the inefficiencies of monopolies restricted output and higher price. Economies of scale—average total cost falls as quantity of output increases Natural Monopoly—technology allows only single seller to achieve lowest average total cost -Natural monopolies are based on current technology, when technology changes, natural monopoly may change to more competitive market structure Two major policies governments use to deal with challenge of natural monopoly are public ownership and regulation Crown corporations—publicly owned businesses in Canada, Achieve economies of scale, but lac of competition weakens incentives to reduce costs or innovate (Canada Post) Rate of return regulations—set price allowing regulated monopoly to just cover average total costs and normal profits 9.2 Strategic interaction among competitors complicated business decisions, creating two smart choices—one based on trust and the other based on non-trust. Game theory—mathematical tool for understanding how players make decisions, taking into account what they expect rivals to do (Nash, beautiful mind) -Gasoline pricing is a strategic decision that can be understood using game theory Prisoners dilemma—game with two players who must each make a strategic choice, where results depend on other players choice. Nash equilibrium—outcome of game where each player makes own best choice given the choice if the other player Two smart choices exists in a prisoners dilemma game; one based on non-trust and one based on trust -If other player cannot be trusted, smart choices is cheat/confess; all players driven to Nash equilibrium outcome where everyone cheats/confesses -If other player can be trusted smart choice is to cooperate/deny; all players driven to equilibrium outcome where everyone cooperates/denies -The prisoners “dilemma” is that each player (prisoner) is motivated to cheat (confess) yet both would be better off if they could trust each other to cooperate (deny). 9.3 Cartels collude to raise prices and restrict output to increase economic profits. Cartels are unstable because members can increase their individual profits by cheating on the others. Collusion—conspiracy to cheat or deceive others Cartel—association of suppliers f
More Less

Related notes for ECO105Y1

Log In


Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.