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Single Seller (Many Buyers) Heterogeneous good Perfect Information Barriers to Entry
Naics can assign any firm reporting in the Census a 6 digit number. Here is what they mean
NAICS 2-digit 3-digit 4-digit 5-digit 6-digit Sector Subsector Industry Group NAICS Industry National
Natural Monopoly : Industry where it is always less costly for a single firm to produce all the output
Costs Insurance Policy(FC)=$1000 Cost of Single Dose of Vaccine (MC)=$10 Demand: 10 Rich People Willing to Pay $200 90 Poor People Willing to Pay $11 Efficient Solution Give 100 Doses (efficient because the value, $11, is greater than the marginal cost) Problem: To sell 100 doses, the price cant be greater than $11, but at a price of $11, profits=$11x100-$1000-$10x1000=-$900 Conclusion:Natural Monopoly most commonly occurs when there are high fixed costs relative to low marginal costs Problem: It is not possible to charge the efficient price (that is, the price at which everyone who places a higher value on the good than the marginal cost of producing it) without losing money
Serious Examples
Roads, Public Utilities Information
Economic Issue Legal Issue: How to interpret an incomplete contract RCs argument: Conditions have changed and it is no longer economical to produce at $.64 MMs argument: So what? The contract is silent on this point, meaning the intent is for you to accept the risk. In fact, this is necessary to keep you from behaving opportunistically
Related examples
Austin Instruments v Loral: a threat to breach a contract in order to coerce signing a new contract GM v Fisher Body: Vertical integration to prevent opportunistic breach