ECON 130 Exam 2 Readings Section 1 (Market Power)

Natural Monopoly (Natural Monopoly – Ramey)

A market where fixed costs are so high relative to variable costs that average cost declines over the entire relevant demand curve, making one firm cheapest for society.

Why Competition Fails in Natural Monopoly (Natural Monopoly – Ramey)

If price is forced to P = MC, firms cannot cover fixed costs and incur losses equal to fixed cost; thus competitive entry is unsustainable.

Monopolist Output Rule (Natural Monopoly – Ramey)

A natural monopolist chooses Q where MR = MC, then charges the highest price consumers will pay for that quantity, creating profits and deadweight loss.

Deadweight Loss in Natural Monopoly (Natural Monopoly – Ramey)

The lost gains from trade between QM and QC since consumers value those units above MC but the monopolist restricts output.

Average Cost Pricing Regulation (Natural Monopoly – Ramey)

Government sets P = AC at Q_AC so the monopolist breaks even (profit = 0) while reducing, but not eliminating, deadweight loss.

Why Average Cost Pricing Still Has DWL (Natural Monopoly – Ramey)

Because P > MC, output remains below the efficient Q*, so some mutually beneficial trades are still lost.

When Natural Monopoly Disappears (Natural Monopoly – Ramey)

If demand expands or technology changes so AC no longer falls, competition can become sustainable.

Daraprim Price Hike Mechanism (“Taking on the Drug Profiteers” – Surowiecki)

Turing exploited regulatory barriers, closed distribution, and lack of FDA-approved competitors to gain monopoly power over an old generic drug.

Rent Seeking in Drug Markets (“Taking on the Drug Profiteers”)

Increasing profits not through innovation but by exploiting loopholes and regulatory rules that block competition.

Why Competitors Didn’t Enter Daraprim Market (“Taking on the Drug Profiteers”)

Small market size, high FDA approval costs, and inability to obtain drug samples prevented generic entry.

Patents vs Daraprim Case (“Taking on the Drug Profiteers”)

Patents reward innovation with temporary monopoly; Daraprim had no innovation justification, so monopoly pricing was pure rent-seeking.

Policy Solutions to Drug Price Abuse (“Taking on the Drug Profiteers”)

Regulatory reciprocity, mandatory sample access, and stronger FTC scrutiny of generic mergers to promote competition.

System vs Individual Problem (Shkreli Lesson) (“Taking on the Drug Profiteers”)

The issue is not one bad actor but a system enabling monopoly pricing through regulatory barriers and weak competition.

Perfect Competition vs Monopoly (Competition Is for Losers – Thiel)

Competitive firms are undifferentiated and earn zero long-run profits; monopolies succeed by solving unique problems others cannot.

Thiel’s View of Competition (Competition Is for Losers – Thiel)

Competition destroys profits; successful businesses seek to become monopolies to capture lasting value.

Creative Monopoly (Competition Is for Losers – Thiel)

A firm so good that no substitute exists; creates new value and drives innovation instead of extracting rents.

Why Monopolists Hide Market Power (Competition Is for Losers – Thiel)

They frame their market broadly (“we’re just an ad company”) to avoid regulation and antitrust scrutiny.

Why Entrepreneurs Underestimate Competition (Competition Is for Losers – Thiel)

Startups define markets too narrowly (“only British food in Palo Alto”), ignoring real substitutes and causing failure.

Dynamic vs Static Monopoly (Competition Is for Losers – Thiel)

Static monopolies extract rents; dynamic monopolies innovate and expand consumer choice.

Monopoly Incentive to Innovate (Competition Is for Losers – Thiel)

Monopoly profits fund long-term R&D and ambitious projects that competitive firms cannot afford.

Amazon “Project Nessie” Example (“US Antitrust Has Reached a Turning Point” – Foroohar)

Amazon used secret pricing algorithms to raise prices across categories because competitors followed Amazon’s lead, showing market power.

Neo-Brandeisian Antitrust Approach (“US Antitrust Has Reached a Turning Point”)

Focuses on power, structure, and market dynamics rather than only consumer prices.

Why Old Antitrust Missed Tech Harms (“US Antitrust Has Reached a Turning Point”)

The Chicago School focused narrowly on low prices, ignoring dominance, exclusion, and long-run ability to raise prices.

Platform Pricing Strategy (“US Antitrust Has Reached a Turning Point”)

Platforms start with low prices to gain dominance, then raise prices once consumers and sellers become locked in.

Amazon’s Power Over Sellers (“US Antitrust Has Reached a Turning Point”)

Amazon punishes sellers who offer lower prices elsewhere, forcing artificially high prices across the marketplace.

Information Asymmetry & Market Power (“US Antitrust Has Reached a Turning Point”)

Big Tech’s data advantage gives them control over pricing, competition, and market outcomes.

Push for Greater Transparency in Antitrust (“US Antitrust Has Reached a Turning Point”)

Courts increasingly demand open proceedings due to excessive redactions hiding Big Tech conduct.

Employer Collusion (The Rigged Labor Market – Krueger)

Employers sometimes make no-poaching or wage-fixing agreements, reducing worker mobility and suppressing wages below competitive levels.

Monopsony Power (The Rigged Labor Market – Krueger)

When employers have wage-setting power from collusion, frictions, or limited alternatives, leading to lower wages and fewer hires.

No-Poaching Agreements (The Rigged Labor Market – Krueger)

Firms agree not to recruit each other's workers; documented in tech, animation, and hospital industries, lowering competition for labor.

Noncompete Clauses (The Rigged Labor Market – Krueger)

Contracts restricting workers from joining rivals; widely used even for low-wage jobs, reducing mobility and bargaining power.

Why Monopsonists Leave Vacancies (The Rigged Labor Market – Krueger)

A monopsonist must raise wages for all workers to hire one more, so it keeps wages low and leaves positions unfilled.

Minimum Wage Effects in Monopsony (The Rigged Labor Market – Krueger)

A modest minimum wage can increase employment by lowering the monopsonist’s marginal cost of hiring.

Evidence on Minimum Wage (The Rigged Labor Market – Krueger)

Research shows little to no negative employment effects, consistent with monopsony rather than perfect competition.

Labor Market Frictions (The Rigged Labor Market – Krueger)

Search costs, mobility costs, and geographic constraints give employers wage-setting power even without explicit collusion.

Policy Solutions for Rigged Labor Markets (The Rigged Labor Market – Krueger)

Raise minimum wage, restrict noncompetes, enforce antitrust in labor markets, and strengthen worker bargaining power.

Adam Smith’s Warning About Labor Collusion (The Rigged Labor Market – Krueger)

Smith predicted employers would collude to keep wages low, a behavior still observed across industries today.