This essay addresses the question of how the behaviour of a monopolist who produces a good which can be recycled differs from a conventional monopolist. While a conventional monopoly is characterised by market control of a single firm and the absence of competition, the existence of firms that recycle the monopolist’s products can exert certain influence on his market power.
Section two deals with some of the most well-known theoretical approaches in this area, whereas, in section three I will illustrate and compare the theory with the example of Aluminium Company of America (Alcoa), who had a monopoly in the virgin production of aluminium.
MONOPOLY AND RECYCLING
BY MICHEL FIGUSCH
UNIVERSITY OF EXETER , DECEMBER 2008
CONSIDER A MONOPOLIST WHO PRODUCES A GOOD WHICH CAN BE RECYCLED. HOW WOULD THE BEHAVIOUR OF SUCH A MONOPOLIST DIFFER FROM A CONVENTIONAL MONOPOLIST? ILLUSTRATE THE THEORY WITH AN APPROPRIATE EXAMPLE.
1. INTRODUCTION
This essay addresses the question of how the behaviour of a monopolist who produces a good which can be recycled1 differs from a conventional monopolist. While a conventional monopoly is characterised by market control of a single firm and the absence of competition, the existence of firms that recycle the monopolist’s products can exert certain influence on his market power.
Section two deals with some of the most well-known theoretical approaches in this area, whereas, in section three I will illustrate and compare the theory with the example of Aluminium Company of America (Alcoa), who had a monopoly in the virgin production of aluminium.2
2. BEHAVIOUR OF A RECYCLABLE GOODS MONOPOLIST
Since a conventional monopolist dominates the market and does not need to fear competition, he is able to use his market power to charge a price in excess of his marginal costs. By contrast, a recyclable goods monopolist can encounter certain competition if there is a recycling industry that collects and reconditions the disposed products and thereafter resells them on a second-hand market.
This is analogous to the situation of a durable-goods monopolist, who faces competition from his own past production. A durable good can be used by the consumer without being exhausted. It can therefore be resold by the consumer on a secondary market which means that the monopolist creates his own future competition and thus is forced to charge the competitive price (Coase 1972). Friedman (1976) asserts that the existence of a competitive recycling industry would tend to compel the monopolist to behave like under competitive circumstances and push the price down to the marginal cost level (pp. 337-338). The monopoly rent would diminish and the monopolist would only make competitive profits.
Martin (1982) weakens this view and argues that the constraint on the virgin producer monopolist depends on how efficient the scrap recovery and secondary production is.
The recycled fraction of the primary product ( [illustration not visible in this excerpt]r ) lies somewhere between 0% and 100%:
illustration not visible in this excerpt
The proportion depends on the existence of depreciation d and shrinkage s3.
Depreciation occurs if not all of the primary product can be recovered as some end uses of the product are destructive. Additionally, shrinkage is due to loss of the recovered scrap during the secondary production (p. 407).
The greater d and s the lower will be the recycled proportion qr but in order to achieve competitive prices on the long-run the recycled fraction of the primary good must be close to 1 (Tirole, 1988, p.80). If the monopolist ceased production while [Abbildung in dieser Leseprobe nicht enthalten], the secondary producers would eventually have to forgo production. (Martin, 1982, p. 409). If there was no depreciation or shrinkage the recycled fraction would be 1 and the recycling sector would be entirely independent of the primary producer in the long run (p. 410). That situation would be identical with a competitive market and would encourage the monopolist to drive the price down to the competitive level.
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1 According to the term “durable goods monopolist”, I will use the term “recyclable goods monopolist”.
2 Alcoa was found guilty of abusing its monopoly power in the famous court decision of 1945. Judge Learned Hand consciously excluded the secondary market for his decision, leaving Alcoa with a market share of over 90%. The question if this controversial decision was correct will not be discussed in this essay, but the analyses by Gaskins (1974) and others showed that ignoring the secondary market was of small consequence anyway (Fisher 1974).
Frequently asked questions about "Monopoly and Recycling"
What is the central question explored in "Monopoly and Recycling"?
The essay investigates how the behavior of a monopolist who produces a recyclable good differs from that of a conventional monopolist. It examines the influence of recycling firms on the market power of a monopolist.
What theoretical approaches are discussed in the essay?
The essay addresses well-known theoretical approaches related to the impact of recycling on a monopolist's behavior. It references Friedman's assertion that a competitive recycling industry can compel a monopolist to behave like a firm under competitive circumstances, pushing prices down to marginal cost. It also mentions Martin's argument that the constraint on the virgin producer monopolist depends on the efficiency of scrap recovery and secondary production.
How is Alcoa (Aluminium Company of America) used as an example?
Alcoa, which had a monopoly in the virgin production of aluminum, serves as an example to illustrate and compare the theoretical concepts. The essay references the famous 1945 court decision where Alcoa was found guilty of abusing its monopoly power. The impact of ignoring the secondary market (recycling) in that decision is also touched upon.
What factors influence the recycled fraction of the primary product?
The recycled fraction (denoted as "r" in the text) is influenced by depreciation (d) and shrinkage (s). Depreciation occurs when not all of the primary product can be recovered due to destructive end uses. Shrinkage results from the loss of recovered scrap during secondary production. The recycled proportion is also an increasing function of price. If price gets too low it may not be worthwhile to recycle.
How does the efficiency of the recycling sector affect the monopolist's behavior?
The more efficient the scrap recovery and secondary production, the greater the constraint on the monopolist. If the recycled fraction of the primary good is close to 1 (achieved with minimal depreciation and shrinkage), the recycling sector becomes largely independent of the primary producer in the long run. This situation resembles a competitive market, encouraging the monopolist to lower prices to competitive levels.
What is the significance of depreciation and shrinkage in the recycling process?
Depreciation and shrinkage reduce the proportion of the primary product that can be recycled. Higher depreciation and shrinkage rates lead to a lower recycled fraction, which weakens the constraint on the monopolist's market power. Conversely, lower depreciation and shrinkage rates result in a higher recycled fraction, increasing competition and potentially forcing the monopolist to behave more competitively.
- Quote paper
- Michel Figusch (Author), 2008, Monopoly and Recycling, Munich, GRIN Verlag, https://www.grin.com/document/125777
