[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

MANAGERIAL SLACK
Chapter 6 argued that any company wants to minimize the cost of producing whatever
level of output it chooses to produce. But in practice, companies already earning
a great deal of money without much competition often lack the incentive to hold
costs as low as possible. The lack of efficiency when firms are insulated from the
pressures of competition is referred to as managerial slack.
In the absence of competition, it can be difficult to tell whether managers are
being efficient. How much, for instance, should it cost for AT&T to put a call through
from New York to Chicago? In the days when AT&T had a monopoly on long-distance
telephone service, it might have claimed that its costs were as low as possible. However,
not even trained engineers could really tell whether this was true. When competition
developed for intercity telephone calls, shareholders in AT&T could compare
its costs with those of Sprint, MCI, and other competitors; competition therefore
provided each company with an incentive to be as efficient as possible.
REDUCED RESEARCH AND DEVELOPMENT
Competition motivates firms to develop new products and less
expensive ways of producing goods. A monopoly, by contrast, may be
willing to let the profits roll in, without aggressively encouraging
technological progress.
Not all monopolists stand pat, of course. Bell Laboratories, the
research division of AT&T, was a fountain of important innovations
throughout the period during which AT&T was a virtual monopolist in
telephone service. The laser and the transistor are but two of its innovations.
But AT&T was also in a unique position. The prices it charged
were determined by government regulators, and those prices were
set to encourage the expenditure of money on research. From this
perspective, AT&T’s research contribution was largely a consequence
of government regulatory policy.
In contrast to Bell Labs, the American automobile and steel industries
are often blamed for falling behind foreign competition because
of their technological complacence. By the end of World War II, these
industries had attained a dominant position in the world. After enjoying
high profits for many years, they lost a significant share of the
market to foreign firms in the 1970s and 1980s. Foreign automobile and
steel firms, for example, were able to undersell their U.S. counterparts
during the 1980s, not only because they paid lower wages but also
because their technological advances had made production processes
more efficient.
More recently, analysts have expressed concern that firms
with monopoly power not only engage in less innovation than they
would under competition but also seek actively to quash innovations by
rivals that could reduce their market power. And even if they do not
PRICE (p)
p m
p c
D
C
Marginal
revenue
curve
FIGURE 13.2
B
A
Q m
Deadweight
loss
G
Q c
QUANTITY (Q )
MEASURING THE SOCIAL COST
OF MONOPOLY
Marginal
cost curve
(MC )
Demand
curve
The higher, monopoly price removes some of the
consumer surplus. Part of this loss (the rectangle ABCD)
is simply a transfer of income from consumers to the
monopolist; the remainder (the triangle ABG) is known
as the deadweight loss of monopoly.
THE DRAWBACKS OF MONOPOLIES AND LIMITED COMPETITION ∂ 291