Microeconomics

Arguments against government monopolies

1. Are inconsistent with freedom (patents). 2.distribution effects are unfair (transfer funds from deserving consumers to underserving monopolists) 3.Encourage people to waste time and $ trying to get a monopoly.

Market structure

Physical characteristics of the market in which firms interact (# of firms, barriers to entry)

Constable market model

when we set our prices we worry about: barriers to entry and exit.

Antitrust Cases (3)

1. IBM Case (1967-1982): The department of Justice sued IBM with unfairly bundling hardware, software, and maintenance services on the take-it-or-leave-it basis. As well, with constantly redesigning its hardware making it impossible for competition. IBM fought against it, stating that it was customers desire to constantly upgrade the system, and the market was big enough. The gov dropped the case in 1982, but IBM was greatly $ affected. They didn't bought DOS operating system from Microsoft, and they went from dominant-to hardware manufacturers. 2. AT&T Case (1982): Att controlled most long-distance and local services (dominant company). They were forced to merged into 7 Baby sells. Results were that local rates doubled and tripled, MCI and Sprint developed, ATT split into three companies. I[1996-Congress passed a Telecommunication act, the telecommunication industry was deregulated, companies were allowed to enter one another's market] 3. Microsoft Case: It control about 50% of the world market software and over 90% of the operating systems. The U.S justice dep charged Microsoft with anti-trust violation (possessing monopolies power, tying other Microsoft products to its Windows operating system). Is Microsoft a monopolist? computer software industry is characterized by network externalities and economies of scale (the more they produce, the lower the cost). In 2000 a federal judge ruled that Microsoft violated the Sherman act by attempting to maintain its monopoly power by antitrust means. Microsoft didn't fought against it, settled down with Justice Dep to stay competitive.

Characteristics of monopolistic competition

1.Many sellers: firms are typically not concerned with what each other are doing- they are price makers. 2.Differentiated products: firms sell products that are heterogeneous - in a sense each firm ha a monopoly in the good that it sells 3.Multiple dimensions of competition: competitions takes many forms - advertising, customer service, distribution outlets 4.Low barriers to entry: simnifically low

Price Discrimination

A monopoly who engages in price discrimination can earn more profit. (air lies super saver, saturday stay over). Charge more = inelastic Charge less= elastic

Antitrust laws (1800s)

A trust or or cartel is a combination of firms in which the firms have not actually merged, but act as a single entry to dominate market. a. The Sherman anti-trust act (1890): is a law designed to regulate the competitive process. "Combination in the form of trust... is declared to be illegal" (cartels are illegal) "Every person who shall monopolize.. guilty of a misdemeanor" (Courts decide its meaning) b. Clayton Act (1914): made 4 monopolistic practices illegal when their effect was to lessen competition: -Price discrimination, Tie-in contracts, Interlocking directorships, Buying stock in a competitors company. c. Federal Trade Commission Act (1914): made illegal for firms: to use unfair methods of competition, to engage in unfair or deceptive acts or practices. -1938: given the job of preventing false and deceptive advertising.

Mergers

Between 1993-2000s firms have been breaking up and merging, breaking up and merging, to achieve economies of scale and scope. 1. Horizontal mergers: merging of 2 companies in the same industry. [Most antitrust policy has centered on HORIZONTAL merger]. Ex: AT&T - Verizon (1950 Cellar-Kefauver act, almost all mergers of firms with substantial market share have been prohibited) 2. Vertical Mergers: is a combination of two companies that are involved in different phases of producing a product. Ex: Airline buy an oil refiner to have their own fuel and gas to save money. 3.Conglomerate mergers: is the merging of two companies in relatively unrelated industries. Ex: Disney purchasing different companies.

Cartel model

Is a combination of firms that acts as if they are single firms. A "shared" monopoly 1. Implicit price collusion ( firms just happen ti charge the sam price) 2.Sticky prices: prices that do not tend to change frequently.

Antitrust policy

Is the government's policy toward the competitive process. a. Judgement by performance: we should judge the competitors based upon their performance ( behavior) of firms. b. Judgement by structure: we should judge the competitors of markets by the structure of the business.

Barriers to entry

Legal: legal situation where a law prevents other firms from entering the market to sell the same product. (Unites States Postal Service). Patents: a patent gives the inventor of a product a monopoly in producing and selling the that product of r a limited amount of time. Copyrights: the same as patent except it is typically given for published materials Natural Monopolies: other firms cannot enter the market because either the startup $ are to high or the cat structure of the market gives an advantage to the largest firm. (electric company)

Monopoly

One firms makes up the entire market (provides the majority of sales) Opposite to competition.

Price wars

Sometimes firms in an oligopoly market might dislike their competition so much.. they will do anything to drive them out of business. Predatory pricing: Pricing strategies of pushing down the price temporally to drive the other firm out of the business. - the goal is to increase long-term profits

Goals of advertising monopolistic competition

The goal of advertising is to shift the demand curve, making the product more inelastic. Two effects of advertising: Shifts the demand curve and increase Average Total Cost (make people believe are produce is unique and makes our cost goes up)

Antitrust policy in other countries

Us have the strongest anti-trust laws in the world. Other countries opposed to them because of: -Lack of strong ideology supporting competition. -Strong cultural ties between government and business. Economies of scale

Oligopoly

When a particular market is controlled by a small group of firms (interdependent). There are at leafs two firms in the market (car manufacturers, airlines, cellphone) Characteristics: Homogeneous of Different Products Firms are mutually interdependent The varies to entry are similar to those in monopoly Largets four firms in an industry controls over 40% of the market. Collusive tendencies ( formal or informal arrangement to coordinate pricing)