No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Eight: Market Structure: From competition to monopoly 187 and therefore their demand curves are more elastic; these customers are very price sensitive. On the other hand, business travelers have few options and their demand curves will be more inelastic and, accordingly, less price sensitive. In effect, price discriminators have (at least) two separate demand curves that they face. If they can charge differential pricing, they can both increase their profits and reduce the deadweight loss associated with price searchers. MONOPOLY POWER IN CEDARS? 2 Chronicles 2:3-8 3 Then Solomon sent word to Huram the king of Tyre, saying, “As you dealt with David my father and sent him cedars to build him a house to dwell in, so do for me. 4 ”Behold, I am about to build a house for the name of the LORD my God, dedicating it to Him, to burn fragrant incense before Him and to set out the showbread continually, and to offer burnt offerings morning and evening, on sabbaths and on new moons and on the appointed feasts of the LORD our God, this being required forever in Israel. 5 ”The house which I am about to build will be great, for greater is our God than all the gods. 6 ”But who is able to build a house for Him, for the heavens and the highest heavens cannot contain Him? So who am I, that I should build a house for Him, except to burn incense before Him? 7 ”Now send me a skilled man to work in gold, silver, brass and iron, and in purple, crimson and violet fabrics, and who knows how to make engravings, to work with the skilled men whom I have in Judah and Jerusalem, whom David my father provided. 8 ”Send me also cedar, cypress and algum timber from Lebanon, for I know that your servants know how to cut timber of Lebanon; and indeed my servants will work with your servants. The cedars of Lebanon were renowned as the best timbers of the ancient world for building; it was only natural that King Solomon would seek out the best when he decided to build the Lord’s Temple. The only place that had both the quantity and quality of timber that Solomon wanted was from Lebanon—controlled by Huram, king of Tyre. The record from 2 Chronicles gives no indication of exploitation of a repeat customer (if you include Solomon’s father, David) by the monopolist producer of timber. Why not? Of course one does not want to offend a powerful neighbor king. But it may simply have been that he wanted the beneficial long-term relationship with a trading partner. Solomon offered a set amount of oil, wine, barley, and wheat, which Huram accepted. The presence of monopoly power in no way ensures consumer exploitation; it only means that there is an incentive to exercise that power. In many cases, such as with King Huram, a monopolist will not exploit customers because other incentives more powerfully constrain behavior. A special case of the price searcher or monopoly model is that of the natural monopoly . A natural monopoly will occur when an industry faces decreasing average costs over the possible range of production that consumers might desire. We understand conceptually from the principle of diminishing returns (and its long-run analogue, decreasing returns to scale) that all companies or industries will eventually face increasing average costs. However, that limit may be well above the output level desired, Natural monopoly: occurs when an industry faces decreasing average costs over the possible range of production, such that it is more efficient for one firm to produce for the entire market. If it is possible to charge differing prices to different buyers and prevent those buyers from trading with each other, then the price searcher may produce larger quantities and gain even more profits.