Monopoly and Recycling

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).

³ For the sake of completeness it is to mention that the fraction is also an increasing function of the price of the good (primary and secondary). If the price would get low enough (i.e. below marginal costs of the recycling industry), it would not be worthwhile to recycle.