Industrial Organization Midterm 2

dominant firm dominance

Lower Costs- Technology, experience, government action, or scale. Better Products- Real or perceived Collusion- If a subset of firms collude, that cartel may act as a dominant firm

Sherman Act

Makes cartels illegal. Prison, fines, treble damages. Conspiracy in restraint of trade is illegal! Prior to this, many industries were legally operated by cartels

Trenton Potteries and Socony Vacuum Oil Company

Specific cases. Price fixing is "per se" violation

monopsony

A market with one buyer. Actions of single agent impact market outcomes

ideal cartel formation conditions

Ability to raise market price Low expectation of severe punishment Low organizational costs Few firms, high concentration, homogeneous products, trade associations

knowledge advantages

Being the only firm that knows how to produce at all and having an absolute cost advantage over other firms

dominant firm behavior

Demand facing dominant firm is residual demand Residual "after" supply of fringe Dd = D − Sf

cartel leniency

Established 1978, revised 1990. Essentially, firms/people have immunity from anti-trust prosecution if you squeal on other members of a cartel

federal trade commission act

Established FTC Section 5: "Unfair methods of competition are hereby declared illegal"

trigger prices

If prices are below a threshold, all firms increase quantity

reasons to not form cartels

Illegal, morally wrong, and card to organize.

monopoly benefits

Incentives to create new products. Incentivize R&D. Patents: operate under legal monopoly for 14 to 20 years. Pharmaceutical patents last 20 years. Also have economies of scale

lerner index

Price-cost margin. the difference between price and marginal cost as a fraction of price.

welfare under cartels

Profits are positive DWL is positive Prices above competitive prices Quantity below competitive output Consumer surplus decreased

Addyson Pipe & Steel

Specific case. Bid rigging and allocating market share is illegal

cheating

This reduces returns to cartel. Cartels want to minimize it. It is easier to detect this if: -Few firms -Prices constant across markets -Prices widely known -Homogeneous products

monopoly

a firm that is the only supplier of a product for which there are no close substitutes. "Residual Demand" or effective demand is market demand. Not competing with other firms. Typically restrict output to earn profits

natural monopoly

a market in which total costs of market output are lowest when produced by 1 firm.

monopoly creation

a result of mergers, collusion, knowledge advantage, or government intervention

dominant firm

a single firm that is a price setter but faces smaller price-taking firms

cartel

an association of firms that explicitly coordinates its pricing or output activities. They act as monopoly or dominant firm

rent-seeking

expending productive resources into non-productive activities to try to gain monopoly power

Meeting Competition Clause

firm will match lower prices by competitors

Most-Favored-Nation Clause

guarantees firm will not sell to a competitor at a lower price, will offer rebate

profit maximization

mr=mc

monopoly behavior

pi=TR-TC but these firms aren't price takers.

Deadweight loss

price of monopolies

competitive fringe

price taking firms with a small share of the market (in presence of dominant firm)