ECO105Y1 Lecture Notes - Lecture 10: Bid Rigging, Price Fixing, Caveat Emptor
Document Summary
Natural monopolies are a market-failure challenge for policymakers. Gain the low-cost efficiencies of economies of scale, but avoid t he inefficiencies of monopoly"s restricted output and higher price. Market failure when markets produce outcomes that are inefficient or inequitable. Economies of scale average total costs decrease as quantity of output increases. Natural monopoly economies of scale allows only a single seller to achieve lowest av erage total cost. Natural monopoly is one cause of market failure. Achieve economies of scale, but lack of competition weakens incentiv es to reduce costs or innovate. Set price allowing regulated monopoly to just cover average total co sts and normal profits. Strategic interaction among competitors complicates business decisio ns, creating two smart choices one based on trust and the other based on lack of trust. Game theory mathematical tool for understanding how players make decisions, tak ing into account what they expect rivals to do.
