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)
