WhatisWrongwithMonopolyAnyway?Acompetitivefirmincreasesproductionaslongaspriceisabovemarginalcost,SoinequilibriumP=MCWhichmeansthatanyonewhovaluesthegoodabovethecostofproducingitgetsitAmonopolysellingallunitsatthesamepriceCanincreaseitssalesonlybyloweringitspriceSostopswhenpriceisaboveMCWhichmeansthatsomewhovaluethegoodatmorethanitscostofproductiondon’tgetitWhichisinefficientPricediscriminationcanreducethisproblemandincreaseprofitChargeahighpricetothosewillingtopayit,alowpricetothosenotIdeallysellingtoeveryonewillingtopayanythingmorethanMCPerfectpricediscriminationentirelyeliminatesthisinefficiencyButperfectpricediscriminationcreatesanewinefficiencyAfirmspendingmoneytomakesurethatitistheonethatendsupwiththemonopolyForinstancebyenteringthemarketearly,losingmoneyforawhile.WhyisMonopoly?NaturalMonopolyexistsifEconomiesofscalecontinueuptothefullsizeofthemarket,sothatOnebigfirmcanproduceatlowercostthanseveralsmalleronesButlargefirmsfacediseconomiesofscale—toomanylayersbetweenfactoryfloorandbossSonaturalmonopolyismorecommoninsmallmarketsArtificialmonopoly.TheideaisthatalargefirmnotanaturalmonopolyDrivesallcompetitorsoutbysellingataloss,sinceithasdeeperpocketsButitisalsolosingmoneyfaster,sinceitisbiggerWhataboutmergertomonopolywherethereisalmostanaturalmonopoly?MakemonopolyprofitsforawhileUntilthehighpricepullsinanewentryGovernmentmonopolyThePostOfficeisamonopolybecauseitisillegaltocompeteinfirstclassmailAirlinesunderregulationorlicensedprofessionshaveentryrestrictedbylawAndmay,asintheairlinecase,havepricecuttingrestrictedbylawPossibleSolutionsNaturalmonopolyBreakitup—butthatraisescosts,createsanunstablesituationRegulateit?IfitisforcedtosellatMCitgoesbroke,sinceitpresumablyhasfixedcostsaswellSoeithersellatMCandhaveagovernmentsubsidyOrtrytomakeitsellataveragecostThisrunsintotheobviousregulatoryproblemsArtificialmonopolyNotaproblemifitdoesn’texistVariouslawstrytopreventsellingbelowcostButthatalsohurtsanewfirmtryingtobreakintothemarketPreventmergersthatwillcreateafirmwithverylargemarketshareStatemonopoly:ThesimplesolutionisnottohaveitCartelsAmarketwithroomforonlyafewfirmsIftheycangettogether,reduceoutput,raiseprice,profitsgoupAtthehigherprice,eachfirmhasanincentivetocheatontheagreementEnforcingacartelagreementbycontractisnotpermittedundercurrentU.S.lawButitcanbeenforcedbyaregulatorwhowantstosupportthecartelEitherbycontrollingprices,asinthecaseoftheCivilAeronauticsBoardOrbycontrollingentryRegulationoftruckingandhealthcarerequiredapermittorunaroute,buildinanareaProfessionallicensingcontrolsthenumberofdoctors,hairbraiders,…ExtendingtheMonopoly:FourstepsTheargument:UseamonopolyinonemarkettogetamonopolyinanotherTherebuttal:DoingthatgetsyounoadditionalprofitThemorethepunchcardscostthelesspeoplewillpayforthecomputerThesteelmonopolistcanpushupthepricesofautoswithoutrunningautocompaniesSimilarlyforthewholesalemonopolist:LettheretailerscompetedowntheirmarginsThepuzzle:Thenwhydotie-insales,verticalmonopolyandRPMhappen?PossibleanswersTieinsalesmightbeawayofpricediscriminatingagainstheavyusersVerticalintegrationfromsteeltoautos(whichdidn’thappen,but…)CouldreducetheinefficiencyduetochargingautocompaniesahighpriceforsteelAndsogivingthemanincentivetosubstitutefiberglassoraluminumHoldinguptheretailpricegetsretailerstocompeteonnonpricedimensionsSuchascostlyshowroomsWhichtheircompetitorscouldfreerideonOneMorePuzzleWhyisn’tuseoftheshowroomorequivalentsoldseparately?AnewbusinessmodelSetupaminivantestagencyBuyoneeachoftheavailablebrandsChargecustomersbythehourtotestdrive,consultyourexperts,readyourliteraturePointthematwhateversellersprovidethelowestpricesWhydoesn’tthatmodelexist?MonopolyinSiliconValleySoftwarehasunlimitedscaleeconomyItisarguedthatitalsohasnetworkexternalitiesIfeveryoneelseisusingWord,thatmakesitconvenientformetouseWordThisistheQwerty/Dvorakstory“TheFableoftheKeys”arguesthatthisstoryisentirelymythicalTheauthorshavealsoarguedthattheobservedpatterninsoftwareIsserialcompetition.OneprogramdominatesforawhileThenanewcompetitorstartsgettingbetterreviewsAndeveryoneswitches(LiebowitzandMargolis)PathDependenceTheQwerty/DvorakstoryisoneversionofpathdependenceEvenifthatexampleisbogus,othersmightnotbeEitherbecauseofnetworkexternalities.ConsiderlanguagesOrbecauseoftheaccumulationofsmallimprovementsForanotherversion,considerthegreatmanversionofhistoryIfJuliusCaesar,orNapoleon,orMohammed,orNewtonhadn’tlivedTheworldthereafterwouldhavebeenverydifferentOrperhapsnotOrtheideaofdecisivebattlesIfHaraldHardraadahadnotinvadedjustbeforeWilliamtheConquerorHaroldmighthavewonHastings,EnglandneverbeenconqueredOrwonHastingsandthenlostagainstHarald,EnglandconqueredbyNorwayDidonebulletatChancellorsvillechangetheoutcomeoftheCivilWar?LegalSystemsVeryDifferentTheIdeaAllsocietiesfaceaboutthesameproblemsTheysolvetheminaninterestingvarietyofdifferentwaysAndtheyareallgrownupsSotrytomakesenseofhoweachlegalsystemworkedSomeofthesystemsImperialChina:2000yearsPericleanAthens:TheLegalSystemofaMadEconomistSagaPeriodIceland:Killsomeone,hisrelativessueyouIslamicLaw:SeparationoflawandstateJewishlaw:WhenGodisthelegislator,whatifHegetsitwrong?18thCenturyEngland:OurlegalsystemwithoutpoliceorpublicprosecutorsRomani:Therestofthehumanraceasenvironment,notpeopleAmish:Anarchists.Veryrulecenteredanarchists.PirateshipsasdemocraciesIndefenseofprisongangsImperialChina:IAsviewedfromabove,apurecriminallegalsystemThereisnowaytosuesomeonefornotpayingwhatheowesyouAllyoucandoisreporthimasaswindlertothedistrictmagistrateThecaseisoutofyourhands.Themagistratecanignorethecase,hecanHavehimpunishedforthecrimeofswindlingMakehimpayyouAsviewedfrombelow,tortlawmasqueradingascriminallawInadditiontoimportantstuff,thereareminormattersLoans,land,marriage,andinheritance.IchargeyouwithnotpayingbacktheloanThemagistrateschedulesacourtdate,commentsonthecaseIthenbargainwithyou,youpaybacktheloanWehumblyaskthemagistratetocancelthecourtdateThemagistrate,beingabusyman,agreesIfwedon’treachagreement,thetrialisheld,themagistratetellsyoutopayIfyoudo,hegenerouslycancelsthepunishmentforyouroffenseImperialChina:IILawandtheextendedfamilyAllrelativesareseniororjuniortoeachother,andwithinsomedegreeofrelationshipAnyoffensebyseniororjunior,thepenaltyisscaleddownByjuniortosenior,thepenaltyisscaledupAccusingaseniorrelativewithintwodegreesofacrimeisacriminaloffenseEvenifheisguiltyWhatisgoingon?TheyarerulingseveralhundredmillionpeoplewithatinybureaucracyPartofthetrickistosubcontractthejobtootherauthoritystructuresOfwhichtheextendedfamilyisthemostimportantSotherulesreinforcethatauthoritystructureTheabilitytoreportcrimesbyseniorswouldgivejuniorspoweroverthemSoisblockedImperialChinaIII:TheExaminationSystemOfficialsareselectedbyaferociouslycompetitiveexaminationsystemEarlyinthefinaldynastyAbout500,000licentiates(passedfirstlevel)inapopulationofseveralhundredmillion~18,000peoplehadpassedsecondlevel.Passrateabout1percentThirdlevelproduced200-300passesoutof~8000eachtimeitwastakenTheexamwastestingthingsmostlyirrelevanttothejobKnowledgeoftheConfucianclassicsandhistoricalliteratureCalligraphyandabilitytowritepoetryandessaysinaparticularstyleWhyhavethesmartestpeoplespendadecadeortwostudyingthisstuff?AtestofIQandwillingnesstoworkhard?SurelytherewerecheaperwaystodothatIndoctrinationYouwantofficialswhobothcandoagoodjobandwanttoTakegoodcareofthepeopleunderthem,obeythepeopleoverthemIndoctrinationinConfucianismmightdothejobTheConfuciantheorywaslawobediencethroughvirtueButthepracticeincludedpenaltiesformagistrateswhodidabadjobIsouremphasisonacollegeeducationamodernequivalent?PericleanAthensAtheniandemocracyLawsweremadebyanassemblyofadultmalecitizens.DirectdemocracyAllofficials,exceptgenerals,werechosenbylotToserveforayearAgovernmentofamateursTheAthenianpopulationPerhapshalfwereslavesSomemoreweremetics—residentaliens,oftenformanygenerationsTherestwerecitizensThecourtsystemTrialbyverylargejuriesPrivatelyprosecutedWhatwastheincentivetoprosecute?Fortheequivalentofcriminallaw,asuccessfulprosecutorusuallygotacutofthefineFortheequivalentofatortprosecution,asinoursystemthewinnercollectedadamagepaymentPericleanAthens:SolvingProblemsHowdoyoupreventabusiveprosecutionforthefineordamagepayment?Criminal:Iflessthan20%ofthejuryvotedforconviction,prosecutorwasfinedCivil:Ifthedefendantwon,theprosecutorowedhimdamages–1/6ththeclaimAnideaitmightbeworthstealingThepenaltyfortheftwastwicethevalueofthegoodsstolenAnobviousopportunitytoplantgoodswhilesearchingYoucouldsearchsomeone’shouseforyourstolengoodsButhadtodoitnakedWehaveasimilarissuewhencopssearchfordrugs.…ProductionofpublicgoodsIfyouwereoneoftherichestAthenians,everyotheryearyouhadtoproduceoneTherelevantmagistratewouldtellyouwhichTwowaysofgettingoutofitShowthatyouaredoingonethisyearordidlastyearShowthatthereissomeonenotdoingonethisyearorlastwhoisricherthanyouareWithoutIRSoraccountants,howdoIproveyouarericherthanIam?IoffertoexchangeeverythingIownforeverythingyouownIfyourefuse,youhaveconfessedtobeingricher,mustdothejobIwasassignedSagaPeriodIcelandInthe10thcentury,HaraldHaarfagrunifiesNorwayunderhisruleLotsofpeoplewhodon’tlikeitemigratetoIceland,recentlydiscoveredSetupalegalsystembasedontheNorwegian,withonethingleftoutThekingTherewasalegislature,acourtsystem,butnoexecutivearmofgovernmentAlloffensesweretreatedastorts,privatelyprosecutedforadamagepaymentVerdictswereprivatelyenforcedIfyoudon’tobeytheverdict,yougetoutlawedItislegaltokillanoutlaw,tortioustodefendhimSoifthedefendantignorestheverdictandfightsThecoalitionagainsthimexpandseverytimesomeoneontheothersideisinjured“We’llintervenetobreakitupbeforeyouhavekilledmorementhanyoucanafford”ForsufficientlyseriousoffensesYouoweafineandalsogetoutlawedButyoucanavoidtheoutlawrybyanoutofcourtsettlementThesagasarehistoriesandhistoricalnovelsWrittenmorethansevenhundredyearsagoFromapopulationofaboutfiftythousandatthefaredgeoftheworldTenormoreofwhicharecurrentlyinprintinEnglishtranslationIslamicLawFiqhnotShari’a,atleastasIinterpretitShari’aislawinthemindofGod,enforcedbyGodpostmortemoneveryoneFiqh,jurisprudence,isthehumanattempttoimplementitashumanlawSeparationoflawandstateThelawisdeducedbyscholarsfromtheKoranandHadithHadithareaccountsofthingssaidordonebyMohammedandhiscompanionsEvidenceofthesunnah(practice)oftheProphetEachcomeswithanisnad,achainoftransmittersThestrengthofahadithdependsonthereputationofthetransmittersAndthenumberofseparatechainssupportingthesamehadith.InSunniIslamtherearefourschoolsoflaw,mutuallyorthodoxButdisagreeingondetailsofwhatrulesarededucedfromthesourcesMuftiandKadiAmuftiisajurisconsult,someonewhogivesadvisoryopinionsonthelaw(fatwas)AKadiisajudge,appointedbytheruler,whotriesanactualcasePossiblyusinginformationonthelawprovidedbyamuftiOriginally,themuftiis“appointed”byreputation,notbyanauthorityButintheOttomanempireiteventuallybecomesanofficialpositionAscontroloverthelegalsystemshiftsfromthescholarstothestateHaddLawLegalruleswithfixedpenaltybasedmostlyontheKoranFiveoffenses.Allrequiretwoeyewitnesses,exceptthat…ForZina,intercoursewithsomeoneneitheryourspousenorconcubineProofrequiresfoureyewitnessestothesameactofintercourseThepenaltyforthosewhohavepreviouslyhadlicitintercourseisstoningtodeathFalseaccusationofZinaTheftPenaltyishavingyourrighthandcutoffButtherearealotofconditionsthathavetobemetforthehaddoffenseoftheftDrinkingwineExactlywhatiscoveredvariesintheviewsofdifferentschoolsandscholarsAsdoesthepenalty—afixednumberoflashesHighwayrobbery(includesbreakingintoahousewithpeopleputinfear)OtherPartsoftheLawTazirPenaltysetbythejudgeatorbelowthehaddpenaltyWeakerrequirementsofevidenceJinayat:KillingorinjuringsomeoneTreatedasanoffenseagainstthevictimorhisheirsProsecutedbythemForfirstdegreemurderHeirscaninsistonretaliationOracceptdiya,bloodmoneypaymentForlesserversionsofkilling,onlydiyaInaddition,killermustfreeabelievingslaveorfastfortwomonthsOthernon-fiqhcourtsThereareavarietyofothercourtssetupbytherulerTheoreticallyinthespiritof,butnotboundby,koraniclawJewishParallelsNotsurprisingly,alotofsimilarityAccordingtoTorah,thedisobedientsonistobestonedButrabbinicscholarsreadintothetextsomanyconditionsThatitisarguedthatitneverhashappenedorwillhappenThehaddoffenseoftheftistreatedsimilarly,althoughalessextremecaseAndthewitnessrequirementsforzina,pluspenaltyforfalseaccusation,makesconvictionunlikelyBothsystemsfacethesameproblemsWhenGodisthelegislator,howdoyouresolvedisagreementsInitially,theGreatSanhedrincouldresolvedisputesbymajorityvoteWhenthatnolongerexisted,whateverauthoritieswereaccepted—reputation,likethemuftiForawhile,theheadsoftheBabylonianacademiesLaterscholarssuchasMaimonidesCommunalauthoritiesclaimedsomepowertolegislate,likethenon-fiqhcourtsWhenGodgetsitwrong,howdoyoufixtheerror?Interpretaroundthingsyoudon’tlikeOrfindexcusesforadditionallegislationoutsidethereligiouslawConsidertheparallelswithU.S.constitutionallawTheOvenofAkhnai(Talmud)Twoschoolsofrabbiniclaw:SchoolsofHillelandShamaiForsomegenerationstheydisagreeaboutthelawbutgetalongLiketheIslamicschoolsoflawEventuallythemajority