Monopoly Level Research Articles

Economies of Scale, Natural Monopoly, and Imperfect Competition in an Experimental Market

This paper reports on the behavior of markets in which all agents have identical costs with economies of scale over the entire range of demand. Each firm, by choosing a larger scale of plant and a larger volume, can experience lower average cost. Thus the markets are characterized by the fundamental technological property that has motivated decades of theorizing about natural monopoly and imperfect competition. The primary question posed by the research is whether or not a natural monopoly emerges and sets prices at monopoly levels or whether the data are more closely approximated by some alternative model of imperfect competition such as monopolistic competition, Cournot oligopoly or contestable market theory. The results are that monopoly emerges and charges prices closely approximated by contestable market theory. No support is found for Cournot forms of oligopoly or for other types of monopolistic competition.

Demand, Pricing, and Regulation: Evidence from the Cable TV Industry

Subsequent to the nationwide deregulation of the cable TV industry, a number of questions have been raised concerning the conduct of cable firms. Answers to these questions turn upon a fundamental set of issues regarding the economic relationships of demand, pricing, and regulation. In this article, we empirically examine these relationships for the period prior to deregulation. A number of basic findings emerge. Among these, we find that the demand for basic cable service ranges from being generally inelastic in rural areas to elastic in large urban markets. The elasticity of demand for pay cable services is typically well in excess of unity. Also, while regulation did not lead to economically efficient (marginal cost) prices for basic cable service, it did act to keep prices below monopoly levels. Moreover, our examination reveals some significant differences in the effectiveness of the various types of regulation practiced in the pre-deregulation period.

Firm/interruptible gas pricing patterns in a regulated environment

This study provides empirical tests for the effects of rate base regulation, curtailment priorities, fuel clauses, and elected commissioners on firm/interruptible gas pricing patterns. These regulations do alter observed pricing patterns with curtailment priorities, fuel clauses, and elected commissioners all producing net social gains. Rate of return regulation imposes social costs resulting in a net decrease in social welfare. Ignoring the political influences upon regulators, regulation generally encourages consumption at the peak relative to the off-peak. Nonetheless, overall social welfare is improved if all four types of regulatory characteristics are present, since most rates are reduced from their monopoly levels.

Dynamic Duopoly: Prices and Quantities

We study a dynamic model of duopoly in which firms choose both prices and quantities. If quantity (capacity) choices are relatively inflexible, firms generally carry excess (idle) capacity in equilibrium. Because of this enforcement cost, firms are unable to achieve monopoly levels. This contrasts with models in which which firms compete in either prices or quantities alone. On the other hand, if capacities are flexible firms may be able to sustain monopoly behaviour.

Competition as a Complement to Regulation

Competition and regulation are often perceived to be in conflict, because regulation usually evolves in response to a failure of the market system. In the case of public utilities in the United States, the familiar argument is that production scale economies make it cheaper for a single firm to provide essential products or services than for two or more firms to do so. To take advantage of the production efficiencies but avoid the resource allocation problems inherent in monopoly levels of price and output, either assets are publicly owned or a privately owned firm is regulated.' In the first case, the incentive to maximize profits is replaced by the need to maximize political support.' Thus the price charged for output is less than the monopoly price. In the second case, states have created public utility commissions (PUCs) to control both access to the market and the monopolist's price and output decisions.

Hospital ‘profits’: The effects of reimbursement policies

This paper provides a theoretical and empirical analysis of the effect of cost-based reimbursement (CBR) on hospital costs and charges. It takes issue with previous analyses which have treated CBR as paying economic costs plus a mark-up, and have concluded that the mark- up is too small to significantly distort hospital decision-making. The basic thesis here is that if reimbursement is based on costs, accounting costs become a price to cost-paying patients, and will be optimized to maximize revenue. A hospital serving both cost and charge-paying (private) patients can set two price schedules. Accounting profits (ratio of charges to costs) are not a measure of economic profit but of relative prices to these two groups of patients. In the absence of constraints from regulation or patient co-payment, the optimum level of accounting costs would be infinite. In practice, the Medicare reimbursement formula links allowable costs to charges received from charge-paying patients. This formula creates incentives for the hospital to raise charges above the single-price, profit-maximizing monopoly level. This inflationary effect of the Medicare formula does not presuppose that Medicare pays less than full cost. The empirical analysis of hospital laboratory costs and charges generally supports the predictions; for other departments, the conclusions are consistent but more tentative because of data limitations. Overall, evidence suggests minimal cross-subsidy between cost and charge-paying patients. Comparisons of cost and charge levels in for-profit, voluntary non-profit and government hospitals are presented, but it is emphasized that inferences about relative efficiency and profitability cannot be drawn from accounting data, given the incentives created by CBR.

Seller Concentration, Barriers to Entry, and Rates of Return in Thirty Industries, 1950-1960

CONVENTIONAL price theory predicts that industries in which output is produced by a few dominant firms may, in the long run, earn higher rates of return on the owners' investment than the opportunity cost of the equity capital, commonly called the normal or competitive rate of return. The emphasis on the long run recognizes that actual profit rates differ from normal in the short run for reasons independent of the number of sellers, e.g., changes in demand or cost which raise or lower profits until the reallocation of resources pushes the industry toward long-run equilibrium. The word may indicates that seller concentration is a necessary, but not sufficient, condition. For instance, if the few sellers fail to cooperate with regard to price and output, profits well turn out to be normal. Or, if entry is relatively easy, the oligopolists set a price close to the competitive level in order to discourage potential entrants. A price policy so designed is called pricing, the limit being that price above which entry would be attracted.' Joe Bain has examined the latter possibility by measuring the influence of barriers to entry, classified as very high, substantial, and moderateto-low, on the profit rates of the leading firms in a sample of oligopolistic industries for the periods 1936-1940 and 1947-1951.2 He expected that the price and the monopoly price would probably coincide in the very high barrier class while oligopolists in markets with substantial or moderate barriers might find it profitable to set an entry-forestalling price below the monopoly level, a price which approaches the competitive price as entry barriers decrease. Therefore, profit rates should decline as barriers to entry decrease. Bain found a distinct difference between the average profit rates of those industries in the very high barrier category and those in the other classes. No such clear difference appeared between the substantial and the moderate-to-low barrier classes. He further found . . that seller concentration alone is not an adequate indicator of the probable incidence of extremes of excess profits and monopolistic output restriction. The concurrent influence of the condition of entry should clearly be taken into account.' The purpose of this paper is to present the results of research into the relationship between seller concentration, barriers to entry, and profit rates for 1950 to 1960 to determine whether the pattern Bain found holds for a period of time that was not part of the Great Depression or of rapid postwar inflation. The findings support Bain's results, suggesting that a beginning has been made toward the accumulation of some evidence regarding the influence of two major aspects of market structure on rates of return.

Professor Bain and Barriers to New Competition

THE importance of actual or potential entry as a determinant of industry performance occupies a central role in neoclassical price theory. In the long run if there is free and easy entry prices will be forced to the level of average costs including necessary profits; if there is no product differentiation by rival sellers the price-output equilibrium will be brought to the low point of the long run average cost curve. If there can be no entry, the industry will either be a monopoly with the highest profitable price or an oligopoly with an indeterminate price. More than likely, however, oligopoly price will tend toward the monopoly level. In Barriers to New Competition, third in a Harvard University series on competition and monopoly in American industry, Professor Bain has attempted to extend neoclassical analysis of entry and recast its role and influence in industrial markets characterized by fewness of sellers. Reduced to its essentials, Bain's hypothesis is that the greater the structural barriers to competition from new sellers, the farther will industry performance be from the 'competitive optimum'. After setting a closely woven theoretical fabric extended from, but still fashioned by orthodox price theory, the author examines factors inhibiting new or potential entry in American industrial markets with often different and varied structural attributes. Empirical evidence of the significance and extent to which these attributes constitute entry barriers is then collected from twenty manufacturing industries. A ranking of these industries is made according to Bain's assessment of the height of entry barriers. Finally predictions as to likely performance of each industry are made and tested against their actual records. Bain's theory, set forth in detail in the first chapter, is that the underlying structural barriers to entry economies of scale, product differentiation, and absolute cost advantages -determine the advantages of established firms over potential entrants. The extent of these governs the degree to which the established sellers are able to maintain their price persistently above the competitive level without