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Chapter 15: Problem 5

The U.S. Postal Service (USPS) is a monopoly because the federal government has blocked entry into the market for delivering first-class mail. Is the USPS also a natural monopoly? How can we tell? What would happen if the law preventing competition in this market were removed?

Short Answer

Expert verified
While USPS exhibits traits of a natural monopoly such as pervasive infrastructure setup, access to mailboxes, and high startup costs, the existence of companies like FedEx and UPS shows competition can exist. If barriers to competition were removed, it could lead to both benefits such as lowered prices and better services, and potential issues like reduced services in rural areas or increased overall costs due to duplicated infrastructure.

Step by step solution

01

Understand Natural Monopoly Concept

To answer this question, it is important to understand what a natural monopoly is. A natural monopoly is a type of monopoly that exists due to the high start-up costs or powerful economies of scale of conducting a business in a specific industry. A natural monopoly occurs when it is less costly for one company, in this case, USPS, to provide the service alone than for multiple companies to share the market. This is often the case in businesses with high infrastructure costs, such as utilities.
02

Examine USPS as a Natural Monopoly

As it pertains to the USPS, many say it is a natural monopoly because it has a ubiquitous infrastructure setup across the country, has singular access to mailboxes which lowers cost, and the high setup costs of installing postal boxes everywhere could be viewed as barriers to entry. However, courier express and parcel delivery services, such as FedEx and UPS, do exist and, while they can't access mailboxes like USPS due to laws explicitly granting USPS this right, they offer services that compete with USPS.
03

Predict the Consequences of Removing Market Entry Barriers

If the barriers for competition in first-class mail delivery were removed, it is possible that competition could lead to lower prices and better services. However, it's also possible that rural areas could see reduced service or higher prices if a competitive model allowed providers to pick and choose where they wanted to deliver mail. Moreover, competition might lead to the duplication of investment and infrastructure, increasing overall system costs.

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Most popular questions from this chapter

Food service firms buy meat, vegetables, and other foods and resell them to restaurants, schools, and hospitals. US Foods and Sysco are by far the largest firms in the industry. In 2015 , these firms were attempting to merge to form a single firm. A news story quoted one restaurant owner as saying, "There was definite panic in the restaurant industry \(\ldots\) when the merger was announced. They know they're going to get squeezed." a. Analyze the effect on the food service market of US Foods and Sysco combining. Draw a graph to illustrate your answer. For simplicity, assume that the market was perfectly competitive before the firms combined and would be a monopoly afterward. Be sure your graph shows changes in the equilibrium price, the equilibrium quantity, consumer surplus, producer surplus, and deadweight loss. b. Why would restaurant owners believe they would be "squeezed" by this development? c. Ultimately, the merger did not occur because the Federal Trade Commission was successful in suing to stop it. The judge who decided the case wrote, "The proposed merger of the country's first and second largest broadline foodservice distributors is likely to cause the type of industry concentration that Congress sought to curb at the outset before it harmed competition." Briefly explain what the judge meant by "industry concentration" and what the results will be of a merger that harms competition.

In discussing the NCAA, the late Nobel Laureate Gary Becker, an economist, wrote, "It is impossible for an outsider to look at these [NCAA] rules without concluding that their main aim is to make the NCAA an effective cartel that severely constrains competition among schools for players." a. What is a cartel? In what ways does the NCAA act like a cartel? b. Who gains and who loses as a result of the NCAA acting like a cartel? If you are a student who does not play intercollegiate sports but who is enrolled at a school with prominent sports teams, such as the University of Alabama or Ohio State University, does the NCAA acting as a cartel make you better off or worse off? Briefly explain.

Will a monopoly that maximizes profit also be maximizing revenue? Will it be maximizing output? Briefly explain.

Most cities own the water system that provides water to homes and businesses. Some cities charge a flat monthly fee, while other cities charge by the gallon. Which method of pricing is more likely to result in economic efficiency in the water market? Be sure to refer to the definition of economic efficiency in your answer. Why do you think the same method of pricing isn't used by all cities?

An article in the New Yorker noted, "The Bronx [borough of New York City] is home to 1.5 million people, two hundred thousand public-school students, eleven colleges and universities, and a single general-interest bookstore a Barnes \& Noble, located in the Bay Plaza shopping center." The article also noted that this bookstore closed at the end of 2016 . Would the only bookstore in the Bronx, or any other city, be considered a monopoly? If so, why would it have closed?
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