Purchasing Monopoly

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Purchasing Monopoly

• The theory of monopoly presumes the condition of
  monopoly, much as theory of competition presumes
  the condition of competition. Neither theory
  seriously attempts to explain how these
  conditions arise, and so they are more aptly
  named the theory of pricing under monopoly and
  the theory of pricing under competitive
  conditions.

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• The Profit of Monopolization
• Implicit assumption that monopoly already
  exists. Assume that only one entrepreneur seeks
  to profit from the conversion of a competitive
  industry to a monopoly.
• Barriers to entry play no important role so the
  task faced by this one monopolizer is not one of
  purchasing a legal barrier to competition but of
  purchasing the power to set price in the face of
  unblockaded entry.

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• The profit to monopolization (per period), then,
  can be thought to vary between
• depending on the payment required to keep
  price-reducing capacity in other industries.
  The minimum subtraction from standard monopoly
  profit is the forgone
  competitive rent .

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• If QEQM can be kept out only by paying owners a
  significant fraction of the monopoly rent they
  forgo by refraining from entering the monopolized
  industry, then the amount that must be subtracted
  from standard monopoly profit to calculate the
  profit to monopolization is larger. The maximum
  subtraction adds the forgone monopoly rent of
  potential entrants, , to the amount
  that must be subtracted.

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• The Propensity to Monopoly
• The tendency to monopoly is thus a function of
  the difference between the rents to monopoly and
  to competition. Ceteris paribus, the more
  inelastic the market demand, the greater is the
  monopoly rent, and the more elastic is the
  supply, the smaller is the competitive rent.
• Figure 10.2 shows the intersection of D at the
  right angled kink of yields a positive
  monopoly rent in combination with a zero
  competitive rent.

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• A reasonable pattern of acquisition prices
  requires the monopolizer to pay more to acquire
  competitive assets the closer he is to completing
  the monopolization of the industry.
• At the very beginning of the acquisition
  process, the probability of successful
  monopolization is close enough to zero that the
  price paid for specialized assets should be no
  greater than their value under competitive
  conditions. At the end of the monopolization
  process the price paid should be very close to
  the monopoly rent.

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• The path of capacity acquisition prices might
  approximate line PCB in Figure 10.3. The return
  to monopolization is then area PCPMDG minus area
  AGB.
• To the extent that there is rivalry to
  monopolize the target industry, the line PCB will
  approach line PMB, so that the return to
  monopolization is even more likely to be
  negative.

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• Estimating the Welfare Loss from Monopolization
• In Harberger-type estimates, the deviation in an
  industrys profit rate from the average of
  manufacturing profit rates, or some such measure,
  is used as an index of the deviation of monopoly
  price from competitive price.
• In Figure 10.4, we use D and PCES to represent
  demand and supply for a Harberger study of the
  deadweight loss of monopoly.

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• The deadweight loss triangle is .
  Harberger theoretically indexes the size of this
  triangle by vertical line AC, with AC empirically
  estimated from recorded profit rates. However,
  in the present analysis, recorded profit rates
  reflect the difference between the vertically and
  horizontally shaded areas
  
• .
• If monopoly is the source of higher recorded
  profit rates, the empirical estimate of AC must
  understate the real magnitude of AC and,
  therefore, of the deadweight loss triangle.

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• The Risks of monopolization
• A departure from the easy monopolization
  assumptions with which we started makes it clear
  that attempts to monopolize are fraught with
  risks of various kinds.
• Some of the risks of monopolization, and some of
  the costs of deterring entry, can be offset by
  abandoning the purely private approach in favor
  of securing government aid. Entry barriers
  imposed and policed by the government present a
  formidable hurdle to the reentry or new entry of
  capacity.