Chapter 9: Monopoly Rules (Government Regulation, Competition, and
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
-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
Rate of return regulations—set price allowing regulated monopoly to just cover
average total costs and normal profits
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
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