1. Natural Monopolies and Regulation

2. Natural Monopoly In markets with a natural monopoly there may be one firm. Economies of scale indicate that at marginal cost pricing firms make a loss. Efficient production involves 1 firm. Firm will naturally charge markup and earn profits.

3. MES and Market Structure If MES is relatively large in comparison with the market demand: $ Q D LRAC The market is most efficiently served by a single firm---natural monopoly!

4. Monopolist: High Fixed Costs MC MR D Q Mono P* Q PC ATC Price Output

5. MC ATC MR D Monopoly Competition Average Cost Pricing

6. Regulation Government may step in, usually to put a maximum price level. Should be minimum amount necessary to get the firm to operate small decisions that lead to a competitive outcome. Average cost pricing Information Problem. A single decision maker may not have full access to enough information..

7. Consequences of Market Power One clear consequence of the existence of market power is that prices are higher than marginal cost and output is smaller than perfect competition. Additional consequences of the presence of market power may be: –Complacency by firms managers (i.e. standard corporate governance measures do not generate efficiency) –Rent-seeking: Firms may put effort into constructing artificial barriers to entry rather than producing goods.