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Managers’ Incentives and the Need for Monitoring Managers have an incentive to keep costs down, but their salaries are included in costs This creates a monitoring problem which is the need to oversee employees to ensure that their actions are in the best interest of the firm Employees’ incentives differ from the owner’s incentives To address this problem, firms sometimes give managers incentive-compatible contracts in which the incentives of each of the two parties to the contract are made to correspond as closely as possible 17-2

What Do Real-World Firms Maximize? Firms have complicated goals that reflect the organizational structure and incentives built into the system Although profit is one goal of a firm, often firms focus on other intermediate goals such as cost and sales Some firms do not push for cost efficiency and become lazy monopolists Lazy monopolists are firms that do not push for efficiency, but merely enjoy the position they are already in 17-3

The Lazy Monopolist and X-Inefficiency Lazy monopolists are not profit maximizers They perform as efficiently as is consistent with keeping their jobs The result is called X–inefficiency where firms operate far less efficiently than they technically could Such firms have monopoly positions, but they don’t make large monopoly profits which can result in earning normal profits or even a loss 17-4

How Competition Limits the Lazy Monopolist New firms or international competition can push lazy monopolies to be more competitive Corporate takeovers, or the threat of one, can improve efficiency A corporate takeover is when another firm or group of individuals issues a tender offer (buy the stock) to gain control and install its own managers Nonprofit organizations may display lazy monopolist tendencies 17-5

How Monopolistic Forces Affect Perfect Competition Laws, social values, and customs in the United States do not allow perfect competition to work because our government emphasizes other social goals besides efficiency The Robinson-Patman Act and several state laws prevent firms from charging a price that is too low The U.S. has laws, regulations, and programs that prevent agricultural markets from working competitively 17-6

Movement Away from Competitive Markets If suppliers of O-L can keep suppliers of L-M out of the market, price increases to PL P S Profit increases by A PL The suppliers kept out of the market lose C in producer surplus A B PM C Consumers lose A+B in consumer surplus D Q O L M Deadweight loss is B+C 17-7

How Competition Forces Affect Monopoly Competitive forces work to break down monopoly by using political or economic forces Lobbying to change the law protecting monopoly Developing a similar product without violating a patent Reverse engineering is the process of a firm buying other firms products, disassembling them, studying them, and then copying them within the limits of the law 17-8

How Firms Protect Their Monopolies Monopolies spend money to maintain their monopoly by: Advertising Lobbying Producing goods that are difficult to copy Not taking advantage of their monopoly position and charging a lower price Firms will buy monopoly power until the marginal cost of maintaining the monopoly equals the marginal benefit 17-9

Establishing Market Position It is argued that modern competition is a winner–take–all competition In winner–take–all markets, the initial competition is on establishing market position The winner who achieves a monopoly can charge significantly higher prices without facing any competition 17-10

Technology, Efficiency, and Market Structure Technological development is the discovery of new or improved products or methods of production Because the global market is significantly larger than a domestic one, globalization provides an incentive to develop new technology Market structures that best promote technological change are dynamically efficient Dynamic efficiency refers to a market’s ability to promote cost-reducing or product-enhancing technological change 17-11

Market Structure and Technology Perfect competition There is no incentive to develop new technologies because they earn no profits to fund research Even if they did innovate, competitors would gain from the new technology without having to pay for it Monopolistic competition Because of market power, monopolistic competition is more conducive to technological change Due to ease of entry, they lack long-run profits, so their ability to recoup their investment is limited 17-12

Market Structure and Technology Monopoly Monopolists have profits but little incentive to innovate since they are protected by barriers to entry Oligopoly May be the market structure that is most conducive to technological change If competitors are innovating, it will force them to do so as well They receive economic profit, oligopolists have the money to carry out research and development 17-13

Network Externalities, Standards, and Technological Lock–In Network externalities occur when greater use of a product increases the benefit of that product to everyone Network externalities lead to market standards and affect market structure Standards are created when a firm’s standard is accepted and dominates the market First-mover advantage helps explain the high stock prices of start-up technology companies Technological lock-in is when prior use of a technology makes the adoption of subsequent technology difficult 17-14