Regulating Natural Monopoly – Flash Animation
Publication: Journal of Economic Education
Volume: 38, No. 2
Issue: Spring 2007
Page: 255
Author(s): K. K. Fung, Sri Harsha Kolar, and Pavan Karnam
Address (Principal Author):
K. K. Fung
Professor of Economics
Department of Economics
University of Memphis
3695 Central Avenue
Memphis, TN 38152
Office Phone: (901) 678-4626
Fax Number: (901) 678-2685
Internet Address (Principal Author): kkfung@memphis.edu
Title: Regulating Natural Monopoly – Flash Animation
URL: http://flashecon.org/natural_monopoly/monopoly.html
Descriptive Note:
Economists have been concerned about the regulation of natural monopoly where
one firm dominates the whole market because of huge scale economy. Under single
pricing, the natural monopoly is assumed to maximize profit by equating marginal
revenue (MR) with marginal cost (MC). But because the natural monopoly enjoys
persistently declining average total cost (ATC) when the huge fixed cost is
spread out over large output, the efficient output where price equals marginal
cost (P = MC) is usually much larger than the maximum profit output (MR = MC).
The regulating agency is caught between a number of very unattractive regulating
approaches: namely marginal-cost pricing, average-cost pricing, or cost-plus
pricing.
The problem disappears if price discrimination is practiced. By capturing
consumer surplus, price discrimination allows the seller to make profit even
when the ATC is entirely above the demand curve. Besides the regulation of
natural monopoly, price discrimination has wide application over many digital
products with high fixed costs and low marginal cost.
To make the comparison between single pricing and discriminating pricing
geometrically manageable, we need a “total willingness to pay” (TWP) curve
depicting the total revenue receivable by the seller if perfect price
discrimination is practiced. With TWP, the concept of economic surplus becomes
very easy to understand. It is nothing but the difference between TWP and TC.
The contrast between TWP and the familiar TR curve under single pricing vs
discriminating can be seen vividly when they are generated dynamically using
self-paced Flash animation. Such navigational flexibility makes the animations
suitable both for classroom presentation and before/after-class review.
In addition to the animations, there is a complete package of ancillary
materials consisting of notes, short-answer questions, a multiple-choice quiz
with instant feedback, and static slides.
Accepted Web Sites
Journal of Economic Education WWW Page