Regulation of Monopoly Price

For larger-scale monopolies, the monopolist’s bargaining power may have relevance for public policy. Historically, the regulation of monopoly in the United States gained momentum as a response to the bargaining power gained by railroads as against local communities that were served by only one line. This led to price discrimination that was widely viewed as unfair (Gifford and Kudrle, 2010, p. 1261). Indeed, this was the predominant understanding of regulation among lawyers and the general public (but not neoclassical economics) until the last quarter of the twentieth century (ibid., pp. 1238, 1255-6). Regulation was to a considerable extent the regulation of price discrimination, and deregulation was the deregulation of price discrimination. An argument for this deregulation of price discrimination begins by “stressing the pervasiveness of bargaining in intermediate good markets and the consequently misleading models that ignore this reality.” Indeed! But the argument continues “forbidding price discrimination ‘constrains the bargaining process by inhibiting buyers from seeking marginal price concessions that lower retail prices’” (Gifford and Kudrle, 2010, p. 1253, quoting O’Brien and Shaffer, 1994).

All of this, as stated, is consistent with the model in this chapter. It is, however, stated in a rather extreme form. It seems that one purpose of the regulatory laws on monopoly was indeed to “constrain the bargaining process” in those cases when it would lead to unfair price discrimination. Once we realize that rational bargainers will not agree on an inefficient price-and-sales strategy, this constraint may achieve a (normative) distributional adjustment without consequent inefficiency.

To model the regulation in terms of two-part tariffs as in the appendix to this chapter, we would add to equation (A11.4.b) or (A11.9f) multiplier terms for a set of upper constraints on customer side payments of the form

where B is the set of all customers of the firm. Then zj might be a constant for all t or might be exogenously determined by a rule of equal treatment of equals; for example z0 might be a fixed proportion of income. The additional multiplier term (for equation A11.4b) would be

The constraint may be binding in some cases and not in others, depending on the individual characteristics of the customer. For example, we may think of a customer who is linked to no other feasible coalitions that could supply a close substitute good (perhaps because she is not located at a rail junction) as against another customer who has other links (located at a rail junction, perhaps) and thus alternative sources of supply. The monopolist coalition would have greater monopoly power in the former case than in the latter, so that, plausibly, the former customer would have less bargaining power, Pt, than the latter. We might then find that (11.17) binds for the former but not in the latter. Let C be the set of customers for which it is binding.

Ideally, then, (11.17) would be binding in cases of “unfair” monopoly prices but not otherwise. In cases in which it is not binding, mi6 = 0. In either case, equation (A11.6d) in the appendix to this chapter is replaced by

Other necessary conditions would be unchanged. All in all, it would seem that, for most of the twentieth century, the legal framework for understanding the regulation of monopoly was sounder than that of the (neoclassical) economists. More recently, the economists’ views having prevailed, it seems that all the professionals have it wrong.

It must again be stressed that all of this applies to the decisions of a given coalition in a given coalition structure, that is, a coalition with given membership. In later chapters, when the membership of the firm is variable, these points will need to be revisited.

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