Chapter 4: Antitrust and Monopoly
Suppose that the demand curve for tickets to see a football team is given by Q=100,000 -100p and marginal cost is 0. (a) How many tickets would the team be able to sell (ignoring capacity constraints) if it behaved competitively and set p=MC? (b) How many tickets would it sell - and what price would it charge - if it behaved like a monopoly. (Hint: In this case the marginal revenue curve is given by MR=1000 -0.02Q.)
(a) Competitive firms have MR=D, sell the Q where D intersects MC (horizontal in this case). If the team sets prices at competitive levels, p=MC, with MC=0. Plug p=0 into the demand equation, Q=100,000 -100p, so Q=100,000. (b) Monopolies maximize profit by choosing Q where MR=MC, then choosing price based on consumer demand curve. If the team acts like a monopoly, it will set MC=MR. MR=1000-0.02Q= 0 =MC --> solve for Q Q=50,000 (50,000)=100,000-100p --> solve for p P=$500
Suppose the typical Buffalo Bills fan has the following demand curve for Bills football games: P=120 -10G where G is the number of games the fans attends. (a) If the Bills want to sell the fan a ticket to all eight home games by selling eight individual tickets, what price must they charge? What are their revenues? (b) Suppose the Bills have the chance to offer a season ticket that is good for all eight home games, a partial season ticket that is good for four home games, and tickets to individual games. What price should they charge? What is their revenue?
(a) If the Bills want to sell tickets to all 8 games by selling eight individual tickets, they have to set the price P = 120 - 10(8) = 120 -80 = $40 This yields revenue of $40(8) =$320 from each fan. (b) If the Bills practice second degree price discrimination, they can effectively charge P = 120 -10(1) = 120 -10 =$110 for single game P = 110 + 100 + 90 + 80 = $380 = $95/ticket for a 4-game package P = 110 + 100 + 90 + 80 + 70 + 60 + 50 + 40 = $600 = $75/ticket for an 8-game package Revenues are clearly much higher for the price discriminating example than one where the team wishes to sell as many as 8 tickets to some fans but must sell tickets individually.
The monopoly power that the NCAA held over TV networks fell apart due to... (explain) (a) the prisoner's dilemma (b) the winner's curse. (c) the outlawing of the reserve clause. (d) the entry of new schools into the NCAA.
(a) Many cooperative arrangements fall apart because of the prisoner's dilemma, as each agent feels that it would be better off acting alone as long as the others continue to follow the agreement. When all agents act on these sentiments, however, everyone becomes worse off.
The antitrust exemption that Major League Baseball enjoys... (explain) (a) is shared by all major professional sports. (b) is not shared in any way by other professional sports. (c) is shared to a limited extent by the other professional sports. (d) is limited to baseball's dealings regarding television and broadcast rights.
(c) While other sports have long been denied the blanket exemption from antitrust laws that baseball has, they have had limited exemptionsfrom antitrust laws. These limited exemptions have allowed the leagues to negotiate broadcast rights or to merge with rival leagues.
Baseball has not been convicted of violating the Sherman Antitrust Act because... ( explain) (a) baseball is the national pastime. (b) baseball was the first sport to institute the Reserve Clause. (c) the Sherman Antitrust Act does not apply to sports. (d) baseball has been exempt from the Antitrust laws.
(d) Thanks to the 1922 Federal Baseball ruling, baseball received an exemption from antitrust laws that was later denied to other sports. While the Curt Flood Act now limits the exemption, baseball still has much greater freedom from antitrust legislation than the other sports.
Why was the limited exemption form antitrust laws so crucial to the development of the NFL?
-The limited exemption allowed the NFL to act as a monopolist over one of its most important sources of revenue—broadcast rights -The monopoly position granted by the limited exemption meant that teams would not undercut one another in negotiations with television networks -The agreement also had the effect of galvanizing the owners into a unified group rather than a loose collection of teams that competed both on and off the field -The off-field cooperation brought about by the joint television contracts and the sharing of resulting revenues significantly strengthened the league
What's wrong with monopoly?
Competitive Market: in a competitive market, firm sells at P and Q where MC meets the demand curve quantity is Qc and price is Pc ($0), consumer surplus is ACE No producer surplus Monopoly: in a monopoly, firm sells at Qm where MR crosses MC, and P where Qm intersects demand consumer surplus shrinks to ABF Producer surplus grows to FBCG DWL of BGE
perfect price discrimination (first-degree price discrimination)
Firm will use first degree price discrimination if they know each consumer's willingness to pay, perfect information extracts the entire consumer surplus by charging the maximum price for each unit perfect monopolist turns each consumer into the marginal consumer Firm no longer has to reduce the price for every unit when they want to sell more tickets If Ian values ticket at $100, MR of selling a ticket to Ian is $100--> MR now coincides with demand curve first degree monopolist will produce the competitive output, MR=D. P=MR=MC No DWL monopolist gets the entire consumer surplus of competitive firm (ACE) Social well-being is maximized, economically efficient, but consumers do not receive this increase in social well-being
Natural Monopoly
If demand is low relative to minimum efficient scale (minimum average total cost), then a monopoly can provide output most efficiently In this case, bigger is better Larger firms have lower unit costsàeconomies of scale Can pass lower unit costs on to consumersàhigher prices b/c monopoly power undercuts competition Natural monopolies have costs as in Fig. 4.6 High start-up (fixed) costs
Strategic Pricing and Discrimination
In the basic monopoly model, monopolist chooses one price and charges it to all customers at all times in the real world, firms charge different prices for the same item at different times and for different customers such pricing enhances the monopolist's profits these strategies include: variable ticket pricing, dynamic ticket pricing, bundling, price discrimination (1st, 2nd, and 3rd degree), and personal seat licenses
Costs of Monopoly to Consumer
Monopolies charge more, monopoly price is greater than competitive price (Pm>Pc) Monopolies produce less, monopolists produce less than competitive firms (Qm<Qc) Higher prices hurt consumers, help producers competitive industry sells Qc tickets, where price=marginal cost NFL's market power allows it to restrict output to Qm, charging a higher price Pm and selling fewer tickets
Suppose that all St. Louis Rams fans feel the same as Jane, who values every game at $28, regardless of the opponent. Can the Rams increase profits by bundling the Rams-Bears game with three others? Why or why not?
No, bundling will not increase team revenues in this case. Product bundling works when firms take advantage of differing demand across products. In this case, however, the demand is the same for all games, so product bundling will be ineffective.
Some economists argue that cooperation between franchises should not be considered in violation of antitrust laws. What argument do they use?
Some economists regard leagues as multiplant firms. According to this view, sports franchises are members of a single entity rather than competing firms. Their cooperation should not be considered any less normal than a single firm's individual departments getting together. Major League Soccer, in particular, is organized as a single-entity league where each team is considered an individual branch of the main company. In Fraser v. MLS(2002), the U.S. Court of Appeals upheld the league's organizational structure as legal.
Bundling
Some fans want to see specific teams very badly→ they are willing to see less attractive games to get the tickets they want Teams bundle less attractive tickets with more attractive tickets. The fan gets to see that team he wants at a relatively low price, and the team sells tickets that it would not otherwise sell. Ex: To see the Cubs play the White Sox, one must also buy a ticket for the game against the Pirates
Quantity Discounts (Second Degree Price Discrimination)
Teams will use this if the don't know what all fans are willing to pay but do know that demand curves slope down--> decreasing marginal utility of each additional ticket fans' marginal utility from consuming a sporting event declines with the quantity of games they attend--> the first hockey game is worth more than the second, which is worth more than the third, which is worth more than the fourth, and so on. It can sell more tickets by reducing overall cost for bulk purchases Many teams offer a variety of partial- and full-season ticket plans in which the cost per game is lower than the cost of buying a ticket to each game individually. the reservation price for the first unit must be higher than the second unit and so on because marginal utility decreases with increase in consumption Charge less per game for a season ticket than for individual tickets Charge less for group tickets than for individual tickets discounts offered to encourage customers to buy in larger amounts
An athletic director was once quoted as saying that he felt his school spent too much on athletics but that it could not afford to stop. Use game theory to model his dilemma.
This is an example of the prisoners' dilemma. If all schools either spend a lot or spend a little, they compete evenly. The problem arises because no school wants to suffer the consequences of being outspent by others. Thus, high spending is the dominant strategy. See the matrix below.
Monopsony
a market structure in which there is only a single buyer of a good, service, or resource→ one seller faces many buyers if it cannot price discriminate, pays more for all units to buy 1 more unit→ Marginal expenditure lies above Supply monopsonist pays less and buys less Monopsonists buy quantity at the intersection of D and ME, QM corresponding price, PM, is obtained from the supply curve, through point QM
Personal Seat License
form of two part pricing→ fans pay for the right to buy season tickets first part of price is a fee that represents part of fans individual consumer surplus, firm claims portion of CS for themselves second part is market price per ticket→ eliminate DWL by charging competitive price for tickets and selling the competitive quantity ideally, firm knows everything about CS and sets price to market rate of zero, firm attempts to set fixed fee equal to ACE to take CS for themselves
Consumer Surplus for Individual Consumer
if price is $0 for good A, and Hannah is willing to pay $160, she receives a consumer surplus of $160
Dynamic Ticket Pricing
some factors that influence demand are not known before the season opens→Dynamic Ticket Pricing allows team to capture additional revenue based on individual game characteristics that are unknown at the start of the season→ adjusts prices during the season as events unfold
Variable Ticket Pricing
some games are more attractive than others (weekends vs. Mondays)→ these factors are known before the season begins→variable ticket pricing sets ticket prices equal to expected demand for a future game Teams charge more for more attractive games→ demand and MR are higher for more popular games→ firm sets MC equal to different MRs This has become popular in NHL
Where did the CS go?
some was captured by the producer→ producer has higher profits→given by area of rectangle FBCG→ transfer from consumers to producers some is just lost→ triangle BGE → less is produced and consumed→ a loss that no one gains is a DWL
Segmented Markets (Third Degree Price Discrimination)
team does not know what each fan is willing and able to pay but knows that some groups of fans are willing and able to pay more than other groups--> know that groups of fans have different demand curves rich alumni are willing and able to pay a lot, students are willing and able to pay for less Demand curve Da, assume constant MC alumni buy Qa and pay Pa Student demand, Ds, is lower, assume MC is the same Qs<Qa and Ps<Pa segmenting allows teams to sell more tickets no student would buy tickets at Pa
Consumer Surplus in Monopoly
the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it
