InefficiencyofPunishmentsDefinepunishmentinefficiencyaspunishmentcost/amountofpunishmentThatmattersbecausewearecomparingdifferentwaysofgettingthesamedeterrenceAndthatisthecostperunitofdeterrenceYoucanscaleupordowntheamountofdeterrencebyvaryingtheprobability“Buying”moreorlessdeterrenceata“price”perunitAfine:WhatonemanpaysanothercollectsPunishmentcostiszero.SoinefficiencyiszeroImprisonment:Punishmentcost>amountofpunishmentExecution:Punishmentcost=amountofpunishmentExecution(orcorporalpunishment)islessinefficientthanimprisonment!ToMinimizePunishmentCostChoosethemostefficientpunishmentConsideranoffensecurrentlypunishedwithfiveyearsinprisonWedeterminethatthatisequivalent,forthecriminal,to1/6chanceofexecutionSowhensomeoneisconvicted,werolladie1-5weturnhimloose6wehanghimDeterrenceisthesame,sovictimsarenoworseoffTheaveragecosttothecriminalisthesameAndwesavethecostofrunningtheprisonWhatiswrongwiththisargument?TheInefficiencyofEfficientPunishmentConsiderfirstalessextremeversionEverysentenceisXdollarsorYyearsThecriminalhastheoptionofspendingYyearsinthestateprisonOracceptinganofferfromaprivateprisontopayhis$XfineInexchangeforsomethinglessthanYyearsworkingintheirprisonfactoryIproposedthatideainanoldarticle.SomeonerespondedThecolonialpowersinAfricahadasimilarapproachIftheyneededaroadbuilt,theyfoundanexcusetoarrestabunchofpeopleAndsentencedthemtoworkontheroadLarryNivenhadsfstorieswithadifferentvariantThereisalwaysashortageoforgans.Sowhenacriminalisexecuted,hisorgansforfeittothestatefortransplantWiththatrulethereisstillashortage,soincreasethenumberofcapitaloffensesIn“TheJigsawMan,”multiplespeedingconvictionsetc.adduptoacapitaloffenseWeneedtothinkabouttheincentivesoftheenforcersaswellastheenforceesProsecutionasRentSeekingWearebackwiththeincentivetoprosecuteThecivilversionoftheproblemTargetingdeeppocketsinsteadofguiltViapunitivedamagesorclassactionsCivilforfeitureforcriminaloffensesMyproposalputsyourownershipofyourlaboratriskNiven’sputsthevalueofyourorgansatriskMydicerollingisn’tquiteasbad,sincethereisnoprofittohangingsomeoneButifpunishmentischeapandpotentialdefendantshavelittlepoliticalpowerWemaybetoowillingtopunish.Anewargumentagainst(cheap)capitalpunishmentWhatisWrongwithCannibalism?Peopledie,whywastethemeat?Icanchoosenottocarrymoney,butnotnottocarrymybodyThisisthebestargumentIknowofagainstamarketfororgansItlookslikeanobviouslygoodidea,but…Youcouldbeworth$50,000onthehoofSobettercombineitwithstrongrulesonchainoftitleItalsoexplainswhyrapeismuchmorecommonthanmurder“Avirginwithasackofgoldcanwalksafelyfromoneendoftheempiretotheother”ThesackofgoldcouldbekeptinasafeAgainrentseekingAntitrustWhatisWrongwithMonopolyAnyway?Acompetitivefirmincreasesproductionaslongaspriceisabovemarginalcost,SoinequilibriumP=MCWhichmeansthatanyonewhovaluesthegoodabovethecostofproducingitgetsitTheefficientpatternAmonopolysellingallunitsatthesamepriceCanincreaseitssalesonlybyloweringitspriceSostopswhenpriceisaboveMCByenoughthatthegainonthelastunitbalancesthereductionofrevenueontheothersWhichmeansthatsomewhovaluethegoodatmorethanitscostofproductiondon’tgetitWhichisinefficientPricediscriminationcanreducethisproblemChargeahighpricetothosewillingtopayit,alowpricetothosenotIdeallysellingtoeveryonewillingtopayanythingmorethanMCMakingtencentsisbetterthanmakingnothingPerfectpricediscriminationentirelyeliminatesthisinefficiencyImperfectpricediscriminationcanreduceorincreaseitSincethegoodsmaygotosomeonewithalowvalueinthepopulationchargedalowpriceInsteadofsomeonewithahighervalueinthegroupchargedanevenhigherhighpriceButperfectpricediscriminationcreatesanewinefficiencyAfirmspendingmoneytomakesurethatitistheonethatendsupwiththemonopolyAndthemonopolyprofitForinstancebyenteringthemarketearly,losingmoneyforawhile.WhyisMonopoly?NaturalMonopolyexistsifEconomiesofscalecontinueuptothefullsizeofthemarket,sothatOnebigfirmcanproduceatlowercostthanseveralsmalleronesButlargefirmsfacediseconomiesofscale—toomanylayersbetweenfactoryfloorandbossSonaturalmonopolyismorecommoninsmallmarketsTheonlygeneralstoreinasmalltownTheonlypublicspeakerwhogivesthesortoflecturesIgiveYourfavoritemysterywriterArtificialmonopoly.TheideaisthatalargefirmnotanaturalmonopolyDrivesallcompetitorsoutbysellingataloss,sinceithasdeeperpocketsButitisalsolosingmoneyfaster,sinceitisbiggerThisistheusualstoryaboutStandardOilbutnotsupportedbytheevidenceGovernmentmonopolyThePostOfficeisamonopolybecauseitisillegaltocompeteinfirstclassmailAirlinesunderregulationorlicensedprofessionshaveentryrestrictedbylawAndmay,asintheairlinecase,havepricecuttingrestrictedbylawPossibleSolutionsNaturalmonopolyBreakitup—butthatraisescosts,createsanunstablesituationRegulateit?IfitisforcedtosellatMCitgoesbroke,sinceitpresumablyhasfixedcostsaswellSoeithersellatMCandhaveagovernmentsubsidyOrtrytomakeitsellataveragecostThisrunsintotheobviousregulatoryproblemsRegulatordoesn’tknowwhatMCorACshouldbeIfsubsidyorpricearesettocovercosts,noincentivetoholddowncostsAndregulatormayhavenoincentivetoregulateformaximumefficiencyArtificialmonopolyNotaproblemifitdoesn’texistVariouslawstrytopreventsellingbelowcostButthatalsohurtsanewfirmtryingtobreakintothemarketAndcostmaynotbewelldefinedforpurposesofregulationStatemonopoly:ThesimplesolutionisnottohaveitCartelsAmarketwithroomforonlyafewfirmsIftheycangettogether,reduceoutput,raiseprice,profitsgoupAtthehigherprice,eachfirmhasanincentivetocheatontheagreementSincethepriceisabovethecostofproductionAndonefirm’sincreasewon’tpushpricesdownverymuchFromthestandpointofthecartel,thisisanexternalityproblemFromthestandpointofthecustomers,afeaturenotabugEnforcingacartelagreementbycontractisnotpermittedundercurrentU.S.lawButitcanbeenforcedbyaregulatorwhowantstosupportthecartelEitherbycontrollingprices,asinthecaseoftheCivilAeronauticsBoardOrbycontrollingentryRegulationoftruckingandhealthcarerequiredapermittorunaroute,buildinanareaProfessionallicensingcontrolsthenumberofdoctors,hairbraiders,…Andsinceonepersoncanonlyworksolong,thatcontrolstotaloutput,hencepriceExtendingtheMonopoly:FourstepsTheargument:UseamonopolyinonemarkettogetamonopolyinanotherRequireusersofyour(monopoly)computertouseyourpunchcardsUseamonopolyinsteeltogetamonopolyinautosResalepricemaintenence:UsewholesalemonopolytogetretailmonopolyprofitTherebuttal:DoingthatgetsyounoadditionalprofitThemorethepunchcardscostthelesspeoplewillpayforthecomputerThesteelmonopolistcanpushupthepricesofautoswithoutrunningautocompaniesSimilarlyforthewholesalemonopolist:LettheretailerscompetedowntheirmarginsThepuzzle:Thenwhydotie-insales,verticalmonopolyandRPMhappen?PossibleanswersTieinsalesmightbeawayofpricediscriminatingagainstheavyusersVerticalintegrationfromsteeltoautos(whichdidn’thappen,but…)CouldreducetheinefficiencyduetochargingautocompaniesahighpriceforsteelAndsogivingthemanincentivetosubstitutefiberglassoraluminumEvenwhen,atthecostofproducingsteel,steelischeaperHoldinguptheretailpricegetsretailerstocompeteonnonpricedimensionsSuchascostlyshowroomsWhichtheircompetitorscouldfreerideonOneMorePuzzleWhyisn’tuseoftheshowroomorequivalentsoldseparately?AnewbusinessmodelSetupaminivantestagencyBuyoneeachoftheavailablebrandsChargecustomersbythehourtotestdrive,consultyourexperts,readyourliteraturePointthematwhateversellersprovidethelowestpricesSpeakingasacustomer…ItwouldmakeiteasierformetocomparedifferentmodelsItwouldbeintheirinteresttopointmeattheleastexpensivesellersAndtheirexpertswouldn’tbetryingtosellmeaparticularmodelWhydoesn’tthatmodelexist?MonopolyinSiliconValleySoftwarehasunlimitedscaleeconomySinceMC~=0AlthoughnottrueofsupportcostsItisarguedthatitalsohasnetworkexternalitiesIfeveryoneelseisusingWord,thatmakesitconvenientformetouseWordThisistheQwerty/DvorakstorySupposedlytheQwertykeyboardwasveryinefficient,butgotanearlyleadDesignedtoslowtypistsdowntoavoidkeyjams—adisadvantagewithbettertypewritersWonanearlyspeedcontestbecauseithadtheworld’sonlytouchtypistAndsocontinuedinuseeventhoughtheDvoraklayoutwasmuchbetterSincetypistshadtobeabletousethetypewritersofficeshad“TheFableoftheKeys”arguesthatthisstoryisentirelymythicalThedesignwastogettypiststoalternatehands,toavoidjammingthekeybankTherewerelotsofcontestsandlotsofsimilarlyfasttypistsTheevidenceforthesuperiorityoftheDvorakkeyboardwaspufferybyDvorakManytypistspreferredtheirowntypewriter,andchangingthelayoutwaseasyFirmsthattriedswitchingtoDvorakfounditatbestslightlybetterTheauthorshavealsoarguedthattheobservedpatterninsoftwareIsserialcompetition.OneprogramdominatesforawhileThenanewcompetitorstartsgettingbetterreview